Swap Meet: ACS And Lockheed Acquire Each Other's PracticesSwap Meet: ACS And Lockheed Acquire Each Other's Practices

In what amounts to a swap of IT units, Affiliated Computer Services has agreed to acquire Lockheed Martin Corp.'s commercial IT outsourcing business while selling the bulk of its government practice to Lockheed Martin.

Lockheed Martin will pay $658 million for ACS's government business, while ACS pays $107 million for Lockheed Martin's commercial business. ACS nets $551 million in cash. It also retains its largest contract--a business-process outsourcing deal with the Department of Education worth about $172 million annually.

As part of the deal, ACS acquires contracts to provide IT outsourcing services to customers in a number of markets, including automotive, retail, and financial services. New customers it acquires from Lockheed Martin include Nike Inc. and Simon & Schuster Inc. ACS additionally gains a larger share of revenue from some current customers that had also been served by Lockheed Martin, including General Motors Corp. and Goodyear Tire & Rubber Co. The new contracts are worth about $240 million annually.

ACS assumes ownership of four Lockheed data centers in the United States, giving it a total of nine in the country. Lesley Pool, senior VP and chief marketing officer at ACS, says the company does not plan to consolidate any of those facilities.

Pool says ACS is backing away from its government business because the company doesn't have the resources to bid for and serve the extremely large contracts that are common in the federal market. "On the other hand, we're too big for some of the niche business," she says. Pool is hopeful that ACS will be able to sell high margin business-process outsourcing services to the IT outsourcing customers it gains from Lockheed. Such services currently account for about two-thirds of ACS's $3 billion in annual revenue.

John Jones, an analyst at SoundView Technology Group, says Lockheed Martin gains contracts that are closely related to its defense contracting business while exiting markets where it wasn't able to establish much presence. "It's hard for the big defense contractors to get brand recognition in the commercial space; the defense work overshadows most of what they do," Jones says. About 5,800 ACS workers will transfer to Lockheed Martin under the deal.

ACS's contract with the Department of Education, under which it provides student-loan processing services for about $172 million annually, is set to expire this year. ACS says it will compete for the new contract, which will run through 2006. The contract is ACS's largest. DOE originally tapped ACS for the contract extension but pulled back the offer after competitors, including Sallie Mae, complained that it wasn't put out for open bidding.

Lockheed Martin and ACS say the deal has been approved by each company's board of directors and that, subject to regulatory approval, it should close in the fourth quarter.

In afternoon trading Friday, shares of ACS were trading down 1.41% to $48.85, while Lockheed Martin shares were off 1.09% to $51.77.