Merger Watch: SI International - Serco Group

by: The M & A Researcher August 29, 2008 | about stocks: SINT    
The M & A Researcher

The M & A Researcher

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Although the SI International, Inc. (SINT) - Serco Group plc merger may be compared directly to CPS-Reed, the immediate impression is that this particular deal will likely be viewed more favorably by the CFIUS due primarily to the fact that Serco is already firmly entrenched as a U.S. government vendor/contractor. In contrast, Reed Elsevier will essentially be entering uncharted and vast territories with respect to government security areas in acquiring CPS. While it is perceived as ultimately a positive for both transactions that the acquiring entity is U.K.-based (as opposed to Asian or Middle Eastern entities), Serco's substantial, established presence as a U.S. government support services provider will very likely allow this deal to avoid the problems Reed is encountering in the CPS transaction.

Also of importance is the basic fact that Serco is intensely involved in a broad range of support services for military personnel, as well as Homeland Security support services. Needless to say, these are areas in which the CFIUS is intimately familiar and can be expected to consider in its review of this transaction, even if these services do not apply directly to SINT's current service offerings. This is naturally a factor that can not be quantified in any way, but it is nonetheless a factor that must me acknowledged in this type of transaction. The recently completed AH-BAE merger is a very clear reference point for this aspect of the current transaction.

It must be pointed out that this is a preliminary assessment and therefore subject to revision upon further research. However, the assessment is a fairly confident one based on the information obtained to this point.

It should also be noted that Serco is closely tied to KBR, which is, of course, tied very closely to the White House, which in turn would be the final arbiter in this case if the CFIUS is unable to reach a decision in the Exon-Florio review. This is a factor that would not come into play much later in the Exon-Florio review process, but it is worth including in the initial analysis for future reference.

In sum, this deal absolutely presents potential national security issues, but not at the level of concern generated in the ongoing CPS-Reed deal. Any issues the CFIUS may identify will very likely be negated by Serco's established presence as a U.S. government contractor and this should ultimately result in Exon-Florio clearance without major difficulties. It will not be surprising if this key approval is obtained within the initial investigation period, based on the information available so far.

Disclosure: We have no positions of any kind, in any security. We are a completely neutral source of research and analysis.

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