Shares of IT services company Science Applications International (NYSE:SAIC), or SAIC, fell as much as 12.6% on Monday but finished the trading day down 9.1%.
The stock's decline followed SAIC's better-than-expected second-quarter results, as well as an announcement from SAIC that it's acquiring Engility Holdings (NYSE:EGL), a staffing and outsourcing services company. The acquisition, which is valued at $2.5 billion when including the assumption of Engility's $900 million in debt, is a significant undertaking given that SAIC's total market capitalization is only around $3.5 billion.
New debt required for SAIC to close the acquisition could be viewed as incremental risk for some investors.
For SAIC's second quarter, revenue and earnings per share were $1.11 billion and $1.13, respectively. This translates to 3% year-over-year revenue growth and 41% year-over-year earnings-per-share growth. On average, analysts were expecting revenue of $1.11 billion and earnings per share of $0.99.
Regarding SAIC's acquisition of Engility, SAIC said in a press release that uniting the two companies "[c]reates the second largest independent technology integrator in government services, with $6.5 billion of pro forma last 12 months' revenue."
The deal is structured to be an all-stock transaction in which Engility shareholders will receive $0.450 shares of SAIC stock for each Engility share they own.
According to SAIC, "Based on an SAIC per share closing price of $89.86 on September 7, 2018, the transaction is valued at $40.44 per share of Engility common stock or $2.5 billion in the aggregate, including the repayment of $900 million in Engility's debt."
The merger agreement isn't official yet, as it is subject to customary closing conditions and regulatory and shareholder approval. SAIC has notably "obtained a financing commitment letter from Citigroup Global Markets Inc. for a new seven-year senior secured $1.05 billion term loan facility under our existing credit agreement."
The companies expect the transaction to close by the end of SAIC's fiscal fourth quarter, which ends on Feb. 1, 2019.