ManTech acquired by The Carlyle Group

ManTech will be taken private through a $4.2B all-cash buyout

On Monday, ManTech (Nasdaq: MANT) agreed to be acquired by private equity specialist The Carlyle Group Inc. (Nasdaq: CG) — the same investment firm that purchased Booz Allen Hamilton (BAH) after BAH split from Booz & Co. in 2008, took BAH public in a 2011 IPO and remained a stockholder until 2016. ManTech has been a publicly traded company since its IPO in 2002. Carlyle agreed to pay $96 per share for ManTech (on Friday, May 13, ManTech’s stock closed at $81.97 per share); taking into account ManTech’s $240 million in net debt, the total transaction value will be $4.2 billion, or roughly 1.6 times ManTech’s trailing 12-month (TTM) revenue of $2.596 billion as of 1Q22.

The sale to Carlyle ends 3 months of speculation about ManTech’s future

ManTech co-founder and longtime CEO (40 years) and Chairman (42 years) George Pedersen stepped down as chairman of the board in 2020 and officially retired from the company’s board in February 2022. His retirement from the board sparked rumors that the company was for sale, and industry observers wondered what would become of Pedersen’s controlling block of voting shares. According to ManTech’s 2021 10-K report, Pedersen held 32% of the common stock as well as nearly 83% of the combined voting power vis-à-vis Class B stock ownership. A Reuters report on Feb. 2 suggested that Pedersen’s family wanted to resolve his estate plan following his retirement, including exploring options for his controlling stake. Carlyle’s per-share purchase price represents a 32% premium on the price of ManTech’s stock as of market close on Feb. 2.

Private equity steps up to buy ManTech, perhaps in lieu of peer interest

When rumors surfaced that ManTech was for sale, it was initially thought that ManTech’s acquirer would be a federal IT peer. Leidos, federal IT’s largest traditional systems integrator, was on the short list of potential buyers. Even after spending over $2.5 billion during 2020 and 2021 on acquisitions, Leidos (NYSE: LDOS) entered 2022 flush with liquidity after back-to-back years of record sales and backlog, sustained profitability, and stronger-than-expected cash from operations in 2021. Leidos certainly had the fiscal war chest to support another strategic purchase, even as it retires debt from its recent acquisition spree.

General Dynamics Technologies (GDT), specifically GDT’s Information Technology (GDIT) segment, was considered a potential buyer, having fiscal resources on par with Leidos, thanks to a corporate parent with a $60-plus billion market capitalization. GDIT has completed its acquisition of CSRA, purchased in 2018 for $9 billion, but the integration process was protracted, reviving speculation that originally surfaced around GDIT’s troubled purchase of Vangent in 2011 that the company struggles to assimilate acquired peers.

Parsons (NYSE: PSN), a longtime construction contractor for the Department of Defense (DOD) and a more recent entrant into the federal IT fray, was also thought to have an interest in ManTech as a way to continue diversifying its portfolio by building out its federal IT capabilities. Buying ManTech would have immediately garnered Parsons the scale to support large federal IT modernization programs, as well as a sizable presence in the Intelligence Community (IC). (ManTech is estimated to generate $1 billion annually from the IC.) However, Parsons would have been forced to rely more heavily on stock to facilitate the transaction, and it was thought the Pedersen family would be less amenable to such an arrangement.

Buying ManTech would have imparted similar benefits upon KBR Inc. (NYSE: KBR) (about $5 billion in federal IT revenue), also believed to be a potential buyer looking to diversify its solutions focus into federal enterprise technology but facing the same potential challenges structuring the transaction in a way that would be favorable to the Pedersen family’s preferences.

Serial federal IT acquirer CACI International (NYSE: CACI) was also rumored to be in the mix to purchase ManTech, which would have expanded CACI’s annual federal IT revenue base ($5.8 billion as of 4Q21 on a TTM basis) past $8 billion in total value, surpassing BAH ($7.9 billion as of 4Q21 on a TTM basis) and SAIC ($7.3 billion as of 4Q21 on a TTM basis), and significantly narrowing the gap with Leidos ($11.8 billion as of 4Q21 on a TTM basis) and GDT (also $11.8 billion as of 4Q21 on a TTM basis, though this includes roughly $4 billion from GDT’s Mission Systems group).

With its recent purchases of Bluestone Analytics (3Q21), an unidentified space-focused company (also in 3Q21), SA Photonics (4Q21) and ID Technologies (1Q22), it appears that the focus of CACI’s M&A strategy is on expanding the company’s high-end, high-margin technology capabilities, particularly in areas that enable wallet-share gains with existing clients in the DOD and IC. CACI’s acquisitions of SA Photonics and ID Technologies also showcase CACI’s preference for leveraging M&A to capture first-mover advantage in solution areas or markets in which the company expects to experience accelerating demand from its core DOD and IC customers.

In addition to its large IC footprint, ManTech is a long-standing IT contractor to the DOD, particularly with its suite of cybersecurity solutions. ManTech’s legacy with the DOD and IC, along with its highly regarded security offerings, would have added value to any of the federal IT peers rumored to be interested acquirers, or other well-funded federal IT competitors (e.g., Accenture Federal Services [AFS], CGI Federal or SAIC). However, ManTech has been a margin laggard in TBR’s Public Sector IT Services Benchmark report in terms of relative operating margin performance. ManTech has been ranked ninth or lower (out of 13 benchmarked companies) in the benchmark report since 2013.

We believe that despite the lucrative nature of its cybersecurity offerings and its operations in the IC, ManTech has largely retained a high emphasis on labor-based services, keeping its margin performance below that of peers. Also impeding relative profitability is ManTech’s focus on being a low-cost but technically acceptable contractor, while peers like CACI, Leidos, BAH and GDT have increasingly recruited superior talent to support a more aggressive pivot up the value chain with their offerings (AI, analytics, cloud, high-end defense platforms, C5ISR [command, control, computers, communications, cyber, intelligence, surveillance and reconnaissance]). In short, ManTech’s federal IT peers might have viewed acquiring ManTech as too margin-dilutive, particularly as a strategic acquisition. TBR also notes that ManTech’s top-line performance has been impeded by the drawdown of military operations in Iraq and Afghanistan over the last decade, while its efforts to expand its footprint in the federal civilian market seemed to stall during late 2021.

Ultimately, it was The Carlyle Group, with over $325 billion in assets under management as of March 31, 2022, that made the purchase. We are not aware of the terms of any competing offers, though we believe ManTech did garner some interest from fellow investment group Veritas Capital — the private equity backer of the three-way merger between Peraton, Perspecta and Northrop Grumman’s IT services unit in early 2021. We expect Carlyle will implement across-the-board cost rationalizations following the acquisition (likely accelerating workforce attrition in an already fiercely competitive federal IT labor market). Carlyle’s deep fiscal pockets will provide ample funding for additional acquisitions to expand ManTech’s suite of offerings in AI, analytics, automation, advanced cybersecurity (e.g., cognitive security), systems engineering and solutions at the tactical edge.

In the end, ManTech may return to publicly traded status as a larger and more profitable federal IT peer with a broader and more lucrative suite of solutions better aligned with the federal embrace of digital technologies, in a scenario more reminiscent of BAH’s IPO in 2011 after three years of Carlyle’s restructuring. Conversely, Carlyle’s ultimate goal may be to sell ManTech to a larger federal IT peer with the fiscal wherewithal for a strategic purchase that will either further cement its leadership position (e.g., Leidos, GDT, BAH or SAIC) or catapult its scale (e.g., CACI, AFS, CGI Federal or even IBM Consulting) into direct contention with established federal IT leaders.