WASHINGTON, March 20, 2018: All we’ve been hearing about lately in Washington and on Wall Street is Facebook, Facebook, Facebook. OK, and maybe Cambridge Analytics. But for denizens of the DMV (local jargon for Washington, D.C. plus the Maryland and Virginia suburbs), big time M&A (mergers and acquisitions) action has come to town. We’re talking about the proposed acquisition of Federal contracting firm CSRA (symbol: CSRA) by Fairfax County-based mega contractor General Dynamics (GD). Now, another Fed contractor, CACI, wants to play.
In recent months General Dynamics has been navigating its way through the mandatory Federal government hoops in its deal to purchase CSRA. According to reports, GD has offered “$44 per share in cash and stock, or some $7.2 billion in total, the company said on March 18.” (Info via Reuters private brokerage feed, no link).
The street has viewed GD’s offer as overly generous but synergistic. But offering big bucks is the way the M&A game gets played these days.
CACI takes on GD
Monday, however, things suddenly got more interesting. Another well-known local Fed contractor, CACI (CACI) decided to play that popular M&A game, “Can you top this?” Again, Reuters reports.
“CACI’s $7.2 bln bid for CSRA is 8 pct higher than the agreed deal General Dynamics struck last month. Neither offer stacks up financially, relying instead on rising U.S. defense spending…. CACI is offering CSRA shareholders $15 per share in cash and roughly $29 per share in stock, or an exchange ratio of 0.184 CACI share for every CSRA share. The offer is around 8 percent higher than the all-cash offer … from defense firm General Dynamics that CSRA agreed to last month.”
Don’t you wish you had this kind of money and credit to play with?
At any rate, it looks like the M&A fun has only just begun. Tuesday, GD announced it would up its offer to CSRA slightly. Note that the final figures vary in various reports.
More on the General Dynamics vs. CACI battle for CSRA
According to CNBC (which again is borrowing from a Reuters report),
“U.S. defense contractor General Dynamics on Tuesday raised its offer for sector peer CSRA Inc to $9.7 billion, including $2.8 billion in debt, in an attempt to top an unsolicited bid from CACI International Inc.
“General Dynamics’ revised offer under a merger agreement with CSRA’s board represents an equity value of $6.9 billion or $41.25 per share in cash, compared with the prior $6.8 billion or $40.75 per share.
“The revised bid from General Dynamics for CSRA, a provider of information technology and related services to the U.S. defense department, is just shy of CACI’s $41.79 per share cash-and-stock offer, based on CACI’s closing price on Monday.
“Given the all-cash nature of General Dynamics’s offer, it has considerably less risk and may prevail over CACI’s bid, analysts have said.
“‘We still think the likelihood of General Dynamics and CSRA deal remains high,’ CFRA Research analyst David Holt wrote in a note.
“Shares of CSRA were up 1 percent at $41.44, while that of General Dynamic rose 1.3 percent to $226.90.”
All three stocks are currently up in otherwise anemic general trading action Tuesday. That’s relatively unusual. Acquiring companies generally take a hit to their common stock price. That’s largely due to the massive leverage needed to make such large acquisitions happen. This could mean that the bidding war may continue for a bit.
What’s in the CSRA acquisition for the players?
The CNBC/Reuters report provides a bit more background on why both GD and CACI seem so eager to close this deal.
“While CACI has been trying to scale up through deals, General Dynamics expects the deal with CSRA to help grab more of the revised defense budget.
“Federal information technology and services spending, down sharply over the past few years due to cuts in defense budget, is expected to pick up again as President Donald Trump seeks to bolster military spending.”
This transaction is of great interest to this DC metro area columnist. We recently held a small position in GD. But sold it off recently for a modest profit due to relentless weakening in the company’s share price.
We suspect the recent jockeying between GD and CACI will end in GD’s favor. That’s due to the former’s cash-superior bid for CSRA. At that point, GD will probably take that nearly predictable share-price hit. This, plus the horrible volatility that still dominates market action post-February crash, makes it prudent to take your profits and run, in our opinion.
Prudent actions in our Prudent Portfolios
As for the rest of our portfolio, we’re trimming things down, sometimes profitably, sometimes not. It feels like we’re in a short-term bear market right now. That’s true even though average investors continue to buy stocks. Problem is, the numbers show that the Big Boyz are still selling them.
Financial analysts like to say that bull markets “climb a wall of worry.” God knows, we’ve had one hell of a wall of worry since the end of January. But there’s just too much instability in this market. Lately, stocks have deteriorated even further, due in part to the political ongoing carny freak show in our shameful city.
Washington seems to be retreating into the primordial swamp from which it originally arose. Politically, this means everything is constantly in play. Which also means you’re wiser to be a nimble, opportunistic investor rather than investing for the long term.
True, long term has been a swell game for Warren Buffett. But unlike Uncle Warren and his billions, most of us won’t last as long as he has. So we have to take what we can get, at least until the fog begins to lift from The Swamp.
We may climb back into GD once some of that fearful CSRA M&A miasma clears. Until then, the bidding game merely adds to the volatility of this stock. Given the current nasty trading action in most stocks, we suspect greater bargains will be available later this year in all sectors.