Shares of Perspecta (NYSE:PRSP) traded up 18% on Friday after activist Jana Partners disclosed a 5.9% stake in the government services company and said it intends to push for change. Perspecta is in a period of transition, and the added pressure from Jana could add to the odds the company ends up being acquired.
Perspecta shareholders were dealt a big blow back in February when the government contractor lost a major bid. The U.S. Navy awarded Leidos Holdings a $7.73 billion award to modernize and maintain computer networks for the Navy and Marine Corps over bids from Perspecta, the incumbent IT vendor for the Navy, as well as others.
The so-called NGEN-R award represented about 15% of Perspecta total sales, leaving a big hole for the company to fill over time. I said at the time it could make the company ripe for a buyout, given the defense sector is a consolidating business and IT specialists in particular tend to do better with scale. It appears Jana might have similar thoughts.
The activist fund run by Barry Rosenstein said in a regulatory filing it has amassed a stake in Perspecta "because it believes the shares are undervalued and represent an attractive investment opportunity." Jana said it intends to hold discussions with management over ways to increase shareholder value, including "discussing industry consolidation, capitalization, capital allocation, operations and board composition."
The next few months could be interesting for Perspecta. The company filed a protest to try to throw out the NGEN award, which the Government Accountability Office (GAO) is expected to rule on by June 17. It wouldn't be unheard of for the GAO to overturn a major award, though it certainly is a long shot.
If we are in for a proxy battle between activists and management, it's hard to say how it will go. Private equity firm Veritas Capital, the architect of a June 2018 three-way merger that created Perspecta, remains a major shareholder with a 14.5% stake.
All of this appears bullish for shareholders. Despite the contract losses, Perspecta is not struggling, with bookings coming in at more than 1.4 times what was billed and with just 8% of its current business up for renewal in the next three years.
A comparable recent government services contractor deal, General Dynamics' 2018 acquisition of CSRA, was valued at about 11 times forward EBITDA. Assume a similar multiple here and Perspecta could be sold for more than $30 per share, compared to its $24.85 price as of this writing.
Perspecta shares prior to the Jana filing were off more than 20% for the year and remain down 6% year to date even after Friday's surge. If the company can somehow reverse the decision on NGEN the stock will likely surge higher. Now, thanks to Jana, there are other ways the stock could get a boost as well.