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Dr. J.P. London G-Con SB Contracting Symp., 6/15/05

Thank you. It's really great to be here to discuss M&A with such a distinguished panel. This is a wonderful gathering of attendees, too. It's my pleasure to be a part of your day. I'm always pleased to talk to you about the topic of the day - M&A. At CACI we have some very definite ideas about how to implement successful M&A strategies. I'd love to share them with you.

Recent CACI M&A Activities

Our company is a $1.6B international IT enterprise. We have grown significantly over the years. Since 2001 CACI has successfully completed nine acquisition deals. I say the deals have been successful, but you don't have to take my word for it. CACI just received the "Deal of the Year" award from the National Capital Chapter of the Association for Corporate Growth for our acquisition last year of the Defense and Intelligence Group of American Management Systems.

The AMS deal was the largest in our company history and entailed the following

  • 300 new contracts
  • $250M in revenue
  • 1650 new employees

Each of the deals we have made has enhanced our company and our bottom line. We're a $1.6B company that has its sights set on being a $3B company by 2009.

As we have designed our growth strategy, M&A activity will be a major part of our plan. And, M&A is a well developed CACI core competency. At CACI we have a staff of M&A professionals who identify and execute deals based on our strategic plan and our corporate culture. That culture is steeped in ethics and integrity. We operate a straight forward business enterprise. Our company's emphasis on quality service and best value plays heavily into our M&A decision making - in fact, all our decision making. Over our M&A history we have put about 1/3 of our current business into CACI from our M&A deals.

Criteria for Evaluating M&A Opportunities

Let's look at some of our criteria for M&A opportunities. There are some principles - across the board principles that we relate to evaluating M&A opportunities. In a minute or two I'll tell you how CACI chooses M&A opportunities. But first, I'd like to talk in general terms. I'd like to point out that acquiring a company is easy. Buying and operating a company successfully is hard. Here are a few things to keep in mind

  • Operational changes offer the opportunity for BIG losses
  • Acquisitions are never, ever risk free
  • Integration is never, ever seamless, and
  • Expectations always exceed actual results

These are unfortunate truths. When going into a deal, you've got to understand these truths and make adjustments for them. To illustrate the point further consider a recent KPMG report that indicates that

  • 50% of companies report a significant lack of success in M&A ventures in overcoming systems and cultural integration issues and resistance to change
  • 67% have no clear process for the execution phase, and
  • 70% have no clear process for the integration phase

These are all pitfalls to avoid. So, here are a couple of tips on how to avoid some of them (I'm not going to share all my tricks).

  • Engage directly with your new clients. Assure them early on of your commitment and ascertain if there are any service problems.
  • Communications. Let me say it again - Communications. If you communicate properly there will be no secrets, no surprises, no hype and no empty promises.
  • Speed of integration. This is critical. Prolonged transitions add costs, slow growth, destroy profits and drag out cash flow goals. Remember - those who learn faster, act quicker and adapt sooner reap the rewards first. Those governed by fear and obsessed with caution must share whatever is left over.

There are a few other issues any company should consider when entering into a deal. They include

  • The deal has to fit into your business plan and fit into your company's culture. You need to know this up front. This compatibility is key. You must assess whether or not this deal will be a springboard for growth and will fit into your strategic plan. This is where people often let their minds play tricks on them.
  • Price and terms have to be the right fit for both parties. In other words, it has to be a win-win deal for all concerned. Ensure that it will be a great opportunity for your employees and a great return for your shareholders. And most important, the customer had better like it, too!
  • Financing and economics. Let's talk about financing. You have to have this in place and well defined before you begin the process - your cash balance or your lending banks. As for the targets you want minimally, forward plan profit (EBIT) margins of 7% to 10%. Of course, higher margins command higher prices. Also, look for at least three consecutive years of profitability. Stay away from turn around or "fixer upper" situations. Seek out the profitable and accretive deals. As for CACI, our war chest is full and getting fuller. We have approximately $100M of cash on hand, a $200M credit facility and $400M shelf registration. Our cash from operations is $115-120M annually. CACI operational margin is 9.5% EBIT.
  • People - yes, people. The most important component of any company. Employees are the most important asset to any company. In deal reviews ask what their reaction will be, how they will assimilate into your company? Look for diverse skill sets and long-term customer relationships. Also, look for folks who have security clearances or who are clearable. In the business we operate the right levels of security clearances are a valuable asset also.

How CACI Chooses M&A Opportunities

I told you earlier that I would talk in general terms and then get down to the details concerning CACI. There are a number of things we look for when choosing M&A opportunities. Here are a few considerations that relate to our considering a deal. We have a full time staff that monitors the marketplace and gauges how to move forward. These people ensure that any deal on our radar screen fits into our strategic business plan. We assign an internal business group champion, and we ensure that the deal is accretive, in terms of future earnings and growth. Growth prospects are crucial.

We fully identify the prospective seller and we assess whether they are ready to sell. For example: We evaluate their employees, their size, location, financial performance and contract base. We also look at their management, ownership. We look at their technology base. We then evaluate the stability of the company. CACI wants to deal with stable, well established and well regarded companies that have a good financial standing and a potential for future success. We look for business longevity, one or more long-term contracts, favorable performance records and a stable management team. We also look for seasoned managers with three to five years of continuity with the company and low employee turnover.

Next, we look at the key personnel. Are they the type of folks we want to work with? Above all else, will they adapt to our corporate culture of ethics and integrity above all else? At CACI we place a great amount of emphasis on proper behavior in all facets of the workplace. If the company we are scouting does not operate right we look elsewhere. Period.

We ensure that any company we are dealing with has a profit making culture and a steady growth record. Again we look for companies that have at least three consecutive years of profitability, and we turn down deals with folks who are in negative financial situations. We also evaluate a prospective company's contract base and check to see if they can bring new projects - appropriate projects - to our portfolio. We prefer a mix of large and small contracts and look for customers that are new to CACI. We avoid single contract, single program and single customer deals. And, we place little to no value on "Small Business" set asides.

We evaluate a prospective company's customer base to ensure that it fits with ours. We don't want to work with companies that don't understand our IT business base and we don't want to have to learn an entire new market sector or industry just to make a deal. We look for a company with a relatively broad-based customer list and one that has no single customer dependency. We prefer a mix of both civilian agencies and DoD. And, we look for companies that have inroads in the defense, intel and homeland security arenas. And to repeat, we only make deals that ensure a first year return to our shareholders. We are always mindful that beyond the customers, our shareholders' well-being is our goal. At CACI we look for the right deal at the right time and make it happen.

People Make the Difference in our Deals

Looking for the right deal involves talking to the right people. We're out there talking and listening all the time. That's because we know that people make the difference in deals. Two distinct sets of people must be satisfied before CACI enters a deal - the customer and the employees. If the fit is too big or too small we walk away. It has to be just right.

And, it has to be in the best interest of our company and the federal government. We understand - more in the last year than ever - that companies that do business with the federal government are under constant scrutiny. We focus our deals on keeping our customers and employees, and doing the right thing. We really are Ever Vigilant when it comes to entering into new areas of government business. So we welcome the spotlight when it inevitably shines. We never have anything to hide.

We Must Be Doing Something Right

I've said that we welcome scrutiny. I also say that we must be doing something right. CACI was recently rated number one in a Wall Street Journal ranking of computer industry stock. And I'm happy to report that we jumped from 56th place to 30th place in the latest issue of Business 2.0 magazine's Top 100 fastest growing technology companies in America. CACI was also just ranked 51st in Business Week's Top 100 Tech Companies listing. We are a top performer year after year with a five-year CAGR above 20%. We're now planning to double our top line by 2009. M&A activity is a serious part of our growth strategy.


As I wind up here I'd like to remind you that the government IT market is very strong now and should remain so in the foreseeable future. We have established a good name for ourselves by delivering quality service and best value for our clients. Every employee at CACI is dedicated to these goals. New hires from acquisitions or other sources, as well as our veterans of 20 or more years - all understand our goals. We are "in the game" for the long haul. Serving our government clients well takes experience and the willingness to go where they need us. And CACI is willing to go at a moment's notice.

Thank you.

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