(Editor's Note: This story has been updated to reflect additional information disclosed by both companies.)
Science Applications International Corp. said today it has agreed to acquire Engility in an all-stock deal worth $2.5 billion to create a $6.5 billion government services contractor.
The move follows significant transformations for both companies. SAIC is a long-time contractor, but its current version was created five years ago when it was split in half; the other part of the company is now known as Leidos. Engility was created six years ago by spinning off parts of L3 Technologies; Engility later added TASC.
The new company would be the second largest contractor of its type; Leidos remains the largest after acquiring Lockheed Martin's IT services business two years ago.
The new company would boast 23,000 employees. Under the terms of the deal, the combined company would be known as SAIC and maintain its Reston, VA, headquarters. Tony Moraco, SAIC's chief executive, would continue as CEO. The company would expand its board to include two Engility board members.
The deal is expected to close by Feb. 1. Once it closes, SAIC shareholders would own about 72 percent of the combined company; Engility shareholders would own about 28 percent.
In a call with analysts this morning, Moraco said the combination "accelerates both companies' long-term strategies."
He particularly noted that adding Engility would bolster SAIC's ability to bid on large intelligence contracts. While both companies have business with the National Reconnaissance Office, he said acquiring Engility gives SAIC a greater presence at other intelligence agencies and a larger cleared workforce "at multiple levels of clearances."
Lynn Dugle, Engility's chief executive, told reporters during an afternoon call the two companies have been pleasantly surprised by the lack of overlap between the two businesses. For instance, she said, while both companies have Navy work, SAIC's is concentrated on the West Coast, while Engility's is focused on the East Coast.
Charlie Mathis, SAIC's chief financial officer, said this morning the contractor expects the deal to generate significant cost savings. He said SAIC has conducted a "detailed analysis" that indicates it would realize $150 million a year in annual savings by the end of the second year.
Dugle told analysts the timing is right for this deal. She said Engility entertained "multiple expressions of interest from various parties."
"It became very obvious that a combination with SAIC represented a superior option," Dugle added.
Moraco said the combination will help the two companies during the current budget upturn and an anticipated return to lower levels.
"Most expect that the current budget levels are not going to be sustained . . . so we believe that we can take advantage of the upside that exists near-term and, in turn, be better positioned . . . to navigate a flatter budget environment," he said.
Joey Cresta, an analyst at market research firm Technology Business Research, said in an analysis provided to Inside Defense the acquisition will certainly position SAIC to "compete more aggressively in the short term for the windfall resulting from busted federal budget caps."
But he warned "there will be no time for the company to rest on its strategic laurels after the deal closes."
"SAIC's long-term challenge will be no different than it is today: the automation of transactional tasks and the technology-driven compression of windows of competitive advantage threaten its legacy business model," Cresta added.