Math is usually pretty straightforward -- until you start dealing with corporate mergers and acquisitions.
Every acquiring company pitches the idea that one plus one will equal something more than two. In truth, most deals end up pretty well short of even producing that "two." With that heavy dose of skepticism in mind, I'm willing to be open-minded about DRSTechnology's (NYSE:DRS) newly announced acquisition of Engineered Support Systems (NASDAQ:EASI).
DRS will pay about $2 billion for Engineered Support's equity and debt. DRS is also offering $43 per share, of which $30.10 will be in cash and $12.90 will be in a portion of DRS stock. That represents a 29% premium to Engineered Support's closing share price yesterday, but not even a 1% premium to the highs seen earlier in 2005. Since I'm sure there are more than a few investors with that price burned into their brains, I wouldn't be too surprised to see some grumbling over the deal.
Be that as it may, the deal would appear to make some sense to DRS. Though the two businesses don't really overlap too much, the acquisition will double DRS's sales and make the combined entity one of the nation's 25 largest defense companies. Better still, according to DRS management figures, no single project would constitute more than 3% of revenue, and the 10 largest projects would be only about 20% of combined sales.
That's a meaningful point, since delays in the Deployable Power Generation and Distribution System project have bedeviled Engineered Support this year. In addition, size matters when making bids on projects. The added "oomph" of the two companies' combined bulk could secure business that might have otherwise slipped through their fingers.
Defense is yet another one of those nastily cyclical businesses. Although it seems like a long time since peacetime budget cuts had even the titans of the industry worried, it'll almost certainly happen again. DRS Technology has pretty good margins, and its valuation seems basically in line with its peers, but investors might want to check out larger, more diversified companies such as General Dynamics (NYSE:GD), L3 Communications (NYSE:LLL), or United Technologies (NYSE:UTX) before buying in. What might be good for Engineered Support isn't necessarily good for your portfolio.
For more defensible takes:
- Is Verint an Intelligent Buy?
- Delays Buckle Engineered Support
- Lessons From the Fall
- General Dynamics Ready to Deploy
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
