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Consolidation accelerates in government contracting. Who’s next in M&A?

Joey Cresta, an analyst with Technology Business Research Inc. in Hampton, New Hampshire, who closely tracks the government services market, wonders if SAIC’s (NYSE: SAIC) deal for Engility — a marriage of two legacy companies providing systems engineering and technical assistance (SETA) services to the government — might signal the beginning of the end of contractors chasing scale.

That advantage, Cresta writes in a new research note, erodes in an era where in-demand, agile tech skills, industry partnerships and expanding intellectual property portfolios will provide more of a competitive advantage than size.

“If SAIC focuses purely on the scale advantage of the Engility deal rather than the IP monetization factor, it could in short order find itself in a race to the bottom,” he adds, “with diminished pricing due to labor automation hamstringing financial flexibility and capacity for continued reinvestment to keep up with the ever-accelerating pace of technological change.”

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Engility, CACI and SAIC do the federal services consolidation tango

On Wednesday, July 11, Reuters released an exclusive report citing unnamed sources that U.S. federal services contractor Engility (NYSE: EGL) is exploring a sale. The report noted interest in Engility from federal services peers CACI (NYSE: CACI) and SAIC (NYSE: SAIC), which both dwarf Engility in size at $4.45 billion and $4.55 billion, respectively, in TBR-estimated 2018 revenues, compared with Engility’s $1.87 billion. The report was no surprise to TBR, as we have been monitoring the consolidation trend within the federal services sector over the past several years, including past deals such as CACI’s acquisition of L-3 National Security Solutions, Leidos’ purchase of Lockheed Martin Information Systems & Global Solutions and General Dynamics’ recently completed acquisition of CSRA.