Kratos Adds Another Defense Company in Growth-by-Acquistion Strategy

11/24/08Follow @bvbigelow

Eric DeMarco, the CEO of San Diego’s Kratos Defense & Security Solutions, (NASDAQ:KTOS) is showing he learned the lessons of rapid growth during his years at former San Diego defense contractor Titan Corp.

Today Kratos announced it’s merging its Kratos Government Solutions division with Digital Fusion, a small defense contractor in Huntsville, AL, that trades over the counter, in an all-stock deal valued at more than $34 million. The deal with Digital Fusion, or DFI, follows Kratos’ acquisition of San Diego’s SYS Technologies earlier this year and Haverstick Consulting late last year.

DeMarco gained experience with many similar buyout deals while working as Titan’s CFO and COO during a growth-through-acquisition strategy that carried Titan from annual revenue of $138 million to roughly $1.5 billion. L3 Communications acquired Titan in 2005 in a deal valued at roughly $2.65 billion, including assumed debt.

DeMarco left Titan in 2003 to join San Diego’s Wireless Facilities, an ailing communications company that he subsequently changed into Kratos, a defense IT and engineering company.

With the DFI deal, DeMarco continues to transform Kratos from a collection of small defense companies into a mid-tier defense contractor. DFI brings Kratos about 280 employees and contracts in missile defense, aerospace, sensors, computerized modeling, and unmanned aerial vehicles.

If shareholders of both companies approve the deal, Kratos will have about 2,250 employees.
Under the agreement, which has been unanimously approved by the boards at both companies, DFI’s stock will be converted into Kratos stock. The deal calls for Kratos to provide 1.7933 shares of its stock for each DFI share.

Kratos says it will issue about 25.4 million new shares of its common stock, which closed yesterday at $1.35 a share after the deal was announced. Upon closing, DFI shareholders will own approximately 20 percent, and current Kratos shareholders approximately 80 percent, of the combined company.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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