This Defense Contractor’s for Sale. Here Are the Potential Buyers.

Key Points

Mantech International is reportedly seeking buyers as the defense IT specialist’s cofounder looks for liquidity.

Mantech does a lot of business with the intelligence community, which is work its rivals would covet.

But Mantech is not growing fast, and many would-be buyers have other things going on, which could limit the upside.

Defense contractor Mantech International ( NASDAQ:MANT ) has reportedly put up a “for sale” sign, with company co-founder George Pedersen said to be exploring options for his controlling stake.

The deal talk surrounding Mantech should come as no surprise. Pedersen is 85 and has stepped away from the business in recent years, factors that had us thinking about a potential sale of the company a little over a year ago.

Mantech, which is valued at about $3.1 billion, would make a tempting morsel for many defense titans . The company generates nearly half of its revenue from the intelligence community. That work tends to be renewed more easily than most government IT work, which makes it more valuable to would-be buyers.

But Mantech today has margins that trail some of its rivals because of the cost-plus nature of much of its business, and it has forecast anemic growth in 2022. Any would-be buyer would have to be attracted to the long-term value in the portfolio and look past what could be a rough few quarters ahead.

A lot of the biggest names in defense, companies like Lockheed Martin ( NYSE:LMT ) and Northrop Grumman ( NYSE:NOC ), have shifted away from defense IT and are unlikely to get involved. But there are still plenty of potential bidders.

Here are four defense companies that are likely to take a close look at acquiring Mantech. Image source: Getty images. Leidos: The biggest name in defense IT

Leidos Holdings ( NYSE:LDOS ) ranks as the largest government IT contractor, a position it has reached by being an active acquirer. Leidos was formed by the 2016 merger between units of SAIC ( NYSE:SAIC ) and Lockheed Martin, and in the years since it has done a number of follow-on deals .

The Reuters report discussing Mantech’s plans said the company and its banker had reached out to Leidos, and for good reason. Leidos is valued at $12.4 billion and has the financial wherewithal to raise the capital necessary to pay for Mantech. A purchase would be a strong strategic fit, making Leidos one of the top contractors to the intelligence community.

But Leidos is still in the process of paying down some of its debt from other acquisitions. The company’s net debt-to- EBITDA ratio today is pushing toward 3, and the company would have to take on significantly more leverage to come up with the cash Pedersen would presumably want in a sale. Parsons: An outsider gaining scale

Parsons ( NYSE:PSN ), the other company mentioned in the Reuters report is a relative newcomer to defense IT. The company’s roots are mostly in construction, including massive projects for the Pentagon and other government customers, but has used M&A to build its tech capabilities over the past decade.

A deal for Mantech would fully establish Parsons in the defense IT world and give it a seat at the table for a wide range of contracting opportunities. But Parsons is similarly sized to Mantech and seems likely to be disadvantaged in a bidding war. Because of its smaller size, Parsons would probably have to lean heavily on stock to get a deal done, which might not be of interest to Mantech’s key shareholder. General Dynamics: The deepest pockets in a bidding war

General Dynamics ( NYSE:GD ) is the only defense IT company that comes close to matching Leidos’ heft, and it’s one of the few top-tier defense contractors that still is heavily invested in the IT business. GD gained significant scale with its $9.6 billion acquisition of CSRA back in 2018, and given its $60 billion market capitalization, it would have no problem paying for another large acquisition.

After a few years spent investing in future products, including a refreshed Gulfstream jet lineup, GD expects to generate more than $3.5 billion in free cash flow in 2022 alone.

However, investors haven’t always been on board with the company’s efforts to grow the IT part of its business. General Dynamics seems almost certain to at least give Mantech a look if its primary defense IT rival, Leidos, is involved in the bidding, but it could decide to put its cash to work on buybacks or investment in other areas […]

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