Legacy’s last gasp: SAIC, Engility and the importance of skills over scale

SAIC’s planned purchase of Engility combines federal contractors with business models similarly disrupted by the march of technology

Themes of consolidation continued to pervade the U.S. federal government IT and professional services market on Monday, Sept. 10, with SAIC (NYSE: SAIC) announcing it will acquire peer Engility (NYSE: EGL). The proposed deal would combine two legacy providers of systems engineering and technical assistance (SETA) and ITO services to U.S. defense, intelligence, civilian and space agencies. The combination makes strategic sense for both parties as the commoditization of labor-based services compresses margins, compelling companies to look for scale advantages to optimize cost structures and maintain competitiveness to capitalize on the federal market’s current upswing.

The proposed deal would add to the lengthy list of market-shaping acquisitions and divestitures over the past five years. SAIC can be viewed as an instigator of the trend, as the company split from its former parent company, now Leidos (NYSE: LDOS), in 2013. Engility has also played a role in the industry’s consolidation through its acquisition of TASC in 2015. In the few years since, Leidos purchased Lockheed Martin’s (NYSE: LMT) IT services business, CSRA briefly gained independence before combining with General Dynamics IT (GDIT) earlier this year, and another new company, Perspecta (NYSE: PRSP), emerged from the combination of DXC Technology (NYSE: DXC) U.S. Public Sector assets with Vencore and KeyPoint Government Solutions.

While scale motivated all of these moves to varying degrees, SAIC’s planned purchase of Engility may represent the beginning of the end of this trend. As rapid technological change disrupts legacy business models, TBR believes the importance of scale will diminish. The deal will help SAIC in the near term, but what the company does next will determine its long-term survivability in the Business of One era.