Dwight Eisenhower had it right. The US military-industrial complex only gets more complicated. On Monday, one of the prime US defence contractors, General Dynamics, announced it was acquiring CSRA for nearly $10bn.
CSRA sounds dull enough. But it comprises one of the set of alphabet-soup private-sector contractors (along with SAIC, CACI) that service the Pentagon and other federal agencies. Last week, Congress and President Donald Trump revised the constraints from the Budget Control Act. Informally, that law was known as “sequestration” and put a hard lid on defence and social spending. Now that Uncle Sam is spending like a drunken sailor, it is no surprise that defence contractors will try to take advantage.
General Dynamics already had an information technology outsourcing unit with $4.5bn in annual revenue. By adding CSRA that rises to $10bn in revenue, making it the second-largest government IT provider. Its willingness to double down is unique. The leading government IT provider, Leidos, is partially a spinout of General Dynamics rival, Lockheed Martin.*
In the past, General Dynamics has admitted that its M&A record was “broken”. It likes the IT services segment because of the combination of relatively high profit margin and low risk. General Dynamics said on Monday it believed service businesses were disproportionally hurt compared with defence product programmes by the 2011 sequestration law. As such, service should commensurately bounce back.
Shareholders in General Dynamics were neither enthusiastic nor shocked by the deal. The company’s shares basically remained flat. Defence prime contractors have rallied sharply in recent years — not just on the back of a Trump bump (General Dynamics shares are up 60 per cent in the past two years) but also from heavy buyback activity. Shareholders might be wondering if the $10bn for CSRA would be better spent on repurchasing more shares. Such disciplined thinking is no longer at the fore in an era unconstrained by austerity.
* This article has been amended to reflect the status of Leidos
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