Acquisition announcements on Fridays are a bit rare, but that was about the only really surprising part of the announcement that IT services provider SRA International (NYSE:SRX) was taking a bid to sell itself. What may be more interesting for investors, though, is the speculation as to whether SRA will get a competing bid and/or whether other leading IT service companies may see a revaluation of their shares.

Tutorial: Fundamental Analysis

SRA - A Solid Bid at Last
There have been rumors for a little while that SRA was attracting buyout interest. There was a rumor back in January that Britain's Serco had offered $2 billion, and the company has basically been in play ever since. Those rumors came to some fruition with the announcement Friday that the company had accepted a bid from Providence Equity Partners for $31.25 a share in cash, or a total deal value of $1.9 billion.

At $31.25 a share, Providence is giving shareholders a 10% premium to Thursday's closing price and more than a 50% premium to the price before the deal speculation really got going. Like the eBay (Nasdaq:EBAY) deal for GSI Commerce (Nasdaq:GSIC), this offer is including a 30-day go-shop period; likely in the hopes of de-fanging the ambulance-chasing class action suits that seem to be popping up these days whenever a deal is announced. (For more, see Is eBay Looking At GSI Commerce As Another PayPal?)

It is also worth noting that management specifically addressed the supposed Serco bid. Though they did not mention Serco by name, they indicated that they had never actually received a bid for $2 billion and had instead only received "expression of interest" in a deal with a price between $30 and $31 a share.

Anybody Next?
SRA is hardly alone in its business of providing consulting, system design and integration services to government clients. What's more, worries about future federal and state budgets have many of SRA's rivals trading at valuations that presume pretty unimpressive growth in the future. Perhaps this deal will stimulate a little M&A activity in the sector and/or a revaluation of some of these shares.

CACI International (Nasdaq:CACI) jumps to mind as one of these candidates. CACI is indeed heavily dependent on the federal government and areas like defense, intelligence and homeland defense particularly, but the company has been seeing good bookings of late. This company would do well to convince investors that it can reverse an unappealing downward trend in operating margins (and returns on capital), but this stock does not look expensive on even modest future growth expectations.

ManTech (Nasdaq:MANT) would likewise seem to be vulnerable to broad cutbacks in government spending. That said, equal across-the-board cuts are not how budgets are typically managed, and the company's focus on counter-terrorism and cybersecurity is likely to be a strong buffer to whatever budget cuts may come. ManTech likewise seems too cheap even with modest forward growth projections.

Along similar lines, while SAIC (NYSE:SAI) gets about three-quarters of its revenue from the Department of Defense, areas like intelligence, surveillance, cyber security, energy and healthcare are not likely to see major spending cuts anytime soon. That means that investors might want to seriously consider this stock, as it offers a double-digit return on capital, an EV/EBITDA of around six, and a solid history of above-market growth and improving margins. (For more, see Mergers And Acquisitions: Understanding Takeovers.)

The Bottom Line
Although SRX shares very briefly traded above the deal price in early Friday trading, it is anyone's guess as to whether there will be a rival offering. There is no question that private equity groups are flush with cash. Moreover, a major defense company like L-3 Communications (NYSE:LLL) Lockheed Martin (NYSE:LMT), Raytheon (NYSE:RTN) or Northrop Grumman (NYSE:NOC) might want to start building up its IT services business, not only to capture efficiencies of scale, but perhaps also as a way of capturing more of what may be a shrinking pie in the near future.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Is Now the Right Time to Buy Brazilian Stocks?

    Examine the current state of the economy of Brazil, and learn why there may be some reasons for investors to look for a rally in Brazilian stocks.
  2. Stock Analysis

    Will WYNN Continue to Rally?

    Wynn Resorts has experienced a rally recently. Will it remain a good bet?
  3. Stock Analysis

    Don't Be Fooled by the Market's Recent Rally

    The bulls won for a bit in early October, but will bears have the last laugh?
  4. Stock Analysis

    Will Twitter's Stock Find its Wings Soon?

    Twitter is an enigma to many investors, but its story is pretty straightforward.
  5. Investing Basics

    How to Think About Seasonality Trends

    Investors benefit when company research incorporates seasonality trends that predict relative strength and weakness throughout the calendar year.
  6. Stock Analysis

    8 Solid Utility Stocks for a Bear Market

    If you're seeking modest appreciation, generous dividend payments and resiliency, consider these eight utility stocks.
  7. Stock Analysis

    Why Phillips 66 (PSX) is a Solid Long-Term Bet

    Here's why Phillips 66 will likely remain one of the world’s largest and most profitable companies for a long time to come.
  8. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  9. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  10. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  1. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  2. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  3. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  4. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  5. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  6. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!