Coverage: General Dynamics is buying CSRA for $6.8 billion

General Dynamics Corp., the maker of Abrams tanks and nuclear submarines, agreed to buy CSRA Inc. for about $6.8 billion to expand its computer-services offerings for government agencies and military customers.

Phil Serafino and Thomas Black of Bloomberg News had the story:

CSRA holders will receive $40.75 a share in cash, General Dynamics said in a statement Monday, a 32 percent premium over the closing price at the end of last week.

The acquisition will make General Dynamics the No. 2 provider of federal IT services, trailing only Leidos Holdings Inc. CSRA, which provides services such as cybersecurity and data analytics, gives General Dynamics more heft as defense spending rises under President Donald Trump and computer-technology contracts get bigger and more complex.

“What we’re doing with this transaction is taking our good GDIT business and making it better, stronger, a more viable competitor,” General Dynamics Chief Executive Officer Phebe Novakovic said on a conference call with analysts and investors. “It’s low risk. It’s got terrific return on invested capital and great cash flow.”

General Dynamics fell less than 1 percent to $211.75 at 1:09 p.m. in New York. CSRA surged 31 percent to $40.40.

Aaron Gregg of The Washington Post reported that the deal is a bet on more defense spending:

The tie-in comes at a time when the government services market is projecting a resurgence after years of sequestration-induced consolidation, as the Trump administration moves to expand the size of the military and move IT systems to the cloud.

“We believe that this combination creates a clear, differentiated leader in the Federal IT sector, with a full spectrum of enterprise IT capabilities, including unique depth in Next-Gen offerings in conjunction with our commercial IT alliance partners,” General Dynamics chief executive Phebe Novakovic said in a statement.

Such an aggressive move into the government services sector was seen as a surprise move for General Dynamics, which has classically relied on large government contracts for military hardware acquisitions such as the Columbia-class nuclear submarine and the M1 Abrams tank. The company also is a market leader in commercial business jets through its Gulfstream subsidiary.

The government IT services industry has seen significant consolidation in recent years, as sequestration put a damper on defense spending and a focus on low-priced contracting arrangements put a damper on margins.

Arunima Banerjee and Mike Stone of Reuters reported that General Dynamics has disappointed investors recently:

The move comes after General Dynamics disappointed investors with weaker-than-expected revenue in the past two quarters, hurt by Congress’s indecision to pass a federal budget.

Shares of General Dynamics, which also makes the Gulfstream aircraft, have underperformed the broader Dow Jones U.S. Aerospace and Defense index .DJUSAE in the past 12 months, hurt also by a subdued business jet market.

“If we get a two-year budget deal … it helps to allow a lot of big projects especially in IT to move forward without hesitation or uncertainty,” Loop Capital analyst Joseph Vafi told Reuters.

General Dynamics, which also makes tanks and U.S. Navy ships, said the deal is valued at $9.6 billion, including $2.8 billion in CSRA debt.