It's been well over two years since the epic tale of Lockheed's (NYSE:LMT) tryst with Titanbegan; nearly a year and a half since it ended; and six months since the Lockheed-scorned Titan found redemption in the welcoming arms of new suitor L-3 Communications (NYSE:LLL). But a good love story never grows old -- it just gets replayed over and over again. (Or at least syndicated on basic cable.)
Yesterday, for instance, we saw a reprise of the Lockheed/Titan portion of last year's saga, as fellow defense contractor General Dynamics (NYSE:GD) announced the signing of a definitive agreement to acquire IT specialist Anteon (NYSE:ANT). The price is another echo of acquisitions past: $2.2 billion, in the form of $55.50 in cash for each outstanding share of Anteon stock, plus the assumption of $100 million in Anteon's debt. Attentive Fool readers will recall that it's the same total price that Lockheed offered for Titan in April 2004, after marking down its purchase price upon discovering Titan's entanglements with the Foreign Corrupt Practices Act.
As was the case with Lockheed's bid for Titan, so too is the chorus already chanting in unison: General Dynamics is overpaying. The chorus has a point -- after all, the $55.50 buyout price alone offers a hefty 36% premium to Anteon's closing price Tuesday evening. But I think there is just as good an argument to be made that the General is not overpaying. Two arguments, actually.
First, valuation. Most analysts reviewing the terms of the deal have focused in on the price-to-sales ratio: 1.3. They point out that Anteon competitor CACI (NYSE:CAI) is only valued at one times sales; that EDS (NYSE:EDS) fetches just 0.6 times. However, remember that in 2004, Lockheed was happy to offer as much as 54 times earnings to acquire Titan, and L-3 ultimately paid even more. In contrast, General Dynamics will be paying only 27 times earnings to acquire Anteon. So while on a P/S basis, General Dynamics might be overpaying, from a P/E perspective, it actually looks to be getting 50% off Titan's sale price.
To bring this column full circle, the second argument in favor of the General's bid is the same one I raised in explaining Lockheed's bid for Titan. Like Titan, Anteon brings its suitor a stable of thousands of security clearance-carrying employees. I said it last year and I'll say it again: To a defense contractor, these employees are worth their weight in gold. Their presence on General Dynamics' payroll will help the company secure more contracts from the Defense Department. Their pre-cleared status means they won't have to sit on their hands, awaiting clearance after a contract has been awarded. Forget Anteon as a company -- acquiring Anteon's employees alone might be worth a couple billion dollars.
Fools, now is the time to open your hearts and wallets to worthy causes! Please support our five Foolish charities at www.foolanthropy.com.
Fool contributor Rich Smith holds no position in any of the companies mentioned in this article. General Dynamics was a recommendation of Motley Fool Select, the precursor to The Motley Fool's small-cap newsletter,Motley Fool Hidden Gems. The Fool has a disclosure policy.
