General Dynamics New Offer for CSRA Outbids CACI
General Dynamics GD recently won against CACI International CACI in the bidding war for the acquisition of CSRA Inc. CSRA. Following a month-long battle, CACI surrendered after a higher purchase price was offered by General Dynamics.
Interestingly, General Dynamics has revised its acquisition deal with CSRA on Mar 20, 2018. Per the agreement, General Dynamics will acquire all of CSRA’S outstanding shares for $41.25 per share in cash, reflecting an increase of 50 cents from the previous proposal. This amounts the total transaction value at $9.7 billion, including $2.8 billion in debt.
What Gave General Dynamics the Upper Hand?
In March 2018, General Dynamics offered to buy CASR for $9.6 billion, including $2.8 billion of debt, while CACI proposed $7.2 billion in cash for the takeover. Although, CACI’s offering of $44 per share was apparently more profitable for CSRA’s shareholders, compared with General Dynamics proposal of $40.75 a share, there remained a few concerns.
For instance, time value of money for investors played a major role in shifting the favor toward General Dynamics. As CACI was planning to close the acquisition formalities by Jul 31, 2018, investors would have had to incur significant opportunity costs due to the four-month lag compared to General Dynamics, which already planned of completing the transaction by early April.
Moreover, General Dynamics believed that CACI’s offer overstated the real value to the CSRA shareholders and understated the overall risks involved. It also stood against CACI’s proposal burdening CSRA with approximately $6.8 billion of debt, once acquired.
All these factors made analysts favor General Dynamics. The last nail in the coffin came after General Dynamics hiked its cash offer by $100 million last week, making it difficult for CACI to match up. Consequently, CACI withdrew its buyout offer, thereby leaving General Dynamics as the sole prospective acquirer.
What’s Ahead for General Dynamics?
In the age of digitization, widespread cyber attacks have prompted all nations to enhance their focus on strengthening their cyber security space. America being the largest digitally advanced country is also the forerunner of securing its technology software and services, thereby expanding the realm for cyber security providers.
Per a report published by Forrester, global purchases of technology software and services by businesses and governments will grow by 4% and software and tech consulting services by 6% in 2018. Therefore, the latest buyout proposal for CSRA by General Dynamics seems to be a strategic step taken by this defense major to expand its footprint in the cyber security space. Notably, the CSRA buyout can help General Dynamics in creating new segment focused on the growing Federal IT services space and in accelerating its growth and profitability, along with improving value proposition and customer base.
Price Movement
General Dynamics’s stock has returned about 17.7% over a year, compared with the broader industry’s gain of 46.7%. The underperformance may have been caused by the intense competition that the company faces in the aerospace-defense space.
Zacks Rank & Key Pick
General Dynamics currently carries a Zacks Rank #3 (Hold).
A better-ranked stock in the same sector is Boeing BA, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Boeing recorded an average positive earnings surprise of 20.69% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has risen by $3.06 to $14.05 in the last 90 days.
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