The SI Organization, a former business unit of defense contractor Lockheed Martin
[LMT], said on Tuesday it has agreed to acquire the engineering services business of QinetiQ North America (QNA) in a deal that will more than double the size of the company and significantly expands its customer base, providing it with substantially more business outside of the intelligence community.
SI will pay $165 million in cash for QNA’s services business and the deal terms include an earnout provision worth up to $50 million in cash, according to QinetiQ, the United Kingdom-based company that owns QNA. QinetiQ said the sale of its United States services business attracted dozens of potential buyers.
The deal is expected to close in the second quarter of this year and result in SI being a $1.3 billion company with 4,800 employees, 2,800 of which are currently engineers, scientists, and other professionals with QNA. QinetiQ said the business it is selling had $780.4 million in sales and an underlying operating profit of $39.9 million. Sales for the business through the first half of FY ’14 were $373.9 million and profits of $17 million.
The pending deal will provides SI with new customers in the Departments of Defense and Homeland Security, and NASA.
The acquisition of most of QNA “accelerates SI’s vision to be a leader in the design, development, integration and operation of complex, mission critical information systems across the government,” Mac Curtis, SI’s CEO, said in a statement. “This transaction creates an opportunity to greatly scale our presence in market adjacencies such as DoD, DHS, NASA and federal agencies.”
QinetiQ will retain its Cyveillance cyber threat warning business, which will be refocused on commercial markets, and the old Foster Miller business that develops and makes tactical robotic vehicles such as Talon and Dragon Runner, as well as a sniper detection system and a wire mesh covering to protect tactical vehicles from rocket propelled grenade attacks. The U.S.-based businesses that QinetiQ is retaining had $19.9 million in sales last year and operating profit of $3 million.
QinetiQ began a strategic review of its U.S. operations in May 2013, saying it lacked scale but was also too big for small business work.
“It is operating in a very competitive market where lowest-price-technically-acceptable is the order of the day, and sale and growth are critical to achieving competitive rates and profitability,” Leo Quinn, QinetiQ’s CEO, said during an investor call to discuss the pending transaction. “That growth, as you know from historical factors, has not been forthcoming.”
Quinn also said the deal will allow QinetiQ to be more focused on its core defense and security work.
QinetiQ’s financial advisors on the transaction include Stone Key Partners LLC, J.P. Morgan and UBS Investment Bank.
Lockheed Martin sold its former EIG business in 2010 to Veritas Capital, which renamed the company The SI Organization. SI is still a portfolio company of Veritas.