The government overseas contingency operations market remains stronger than many predicted, and Julian Setian, president and CEO of Reston, Virginia-based SOS International, was one of the few who recognized it.
SOSi is now among the best-positioned firms to take advantage of the opportunities this market growth presents. Even as Setian continues to grow his overseas mission support business, he has simultaneously hedged his bets over the past few years by investing in cyber, data analytics, and software development.
In late July, the House passed its annual defense policy bill, with nearly $70 billion earmarked for the OCO account. Shortly before that, the Pentagon’s Defense Security Cooperation Agency saw a record-breaking month for military sales, suggesting a complementary ascent in the need for operations, logistics, maintenance and training services to support many of the large, complex systems being sold overseas. “As time goes on, I think the overseas market will continue to present among the largest opportunities for growth in the government services sector,” Setian said. “Government spending is on the rise, and defense, national security and intelligence agency budgets are increasing.”
For Setian, a senior executive in the defense and government services sector for more than two decades, this government-driven demand is something his company is poised to fill — in large part, as a result of a bold move in recent months that caught many in the industry off guard.
“There is no question we are in the right space when it comes to our overseas presence — the company’s recent market activity has proved that out,” Setian said. “Our challenge is to use our positioning to diversify into other higher value areas of the market.”
‘Truly Transformative’ Acquisition
This past spring, SOSi built on its standing as the largest private company in the defense and government services market with no outside equity partners by doing what it has long staked its reputation on: thinking beyond conventional market wisdom.
In what has become its third acquisition in just over two years, SOSi placed its bet on STG Group Holdings, Inc., a distressed publicly held company that provided cyber, software and intelligence solutions to the U.S. government. According to SEC filings, the deal was finalized at an $83 million sale price.
The company, a pure-play cyber and software development company that had done $300 million in sales just two years earlier, had been trending downward when Setian acquired the company. Setian predicted the synergies between the two businesses would enable him to turn the trend the other direction — a bet that has already begun yielding dividends, as the company recently won a $55 million contract with the U.S. Army to provide global Wideband Enterprise Satellite Systems support to the Army’s Program Executive Office for Enterprise Information Systems.
Less than a year earlier, SOSi acquired Defense Group, a Vienna, Virginia-based cyber and data analytics firm that served the U.S. intelligence and national security communities, and in January 2016, the company purchased New World Solutions, a firm specializing in hyperspectral and multispectral image and data sciences.
“The STG acquisition was truly transformative,” Setian said, “but all three of our acquisitions form part of a broader diversification and growth strategy, which is focused as much on the quality of our growth as the growth itself.”
A cursory look at the companies’ combined capabilities reveals Setian’s strategy: At roughly half the size of SOSi, STG significantly boosts the company’s size while broadening its services to include critical expertise in enterprise software development, network operations and information assurance. Setian’s two previous acquisitions, meanwhile, accelerated the company’s growth in the cyber, intelligence and ISR markets.
‘Balancing Out’ Service Offerings
Setian saw the acquisitions as a way to strategically counterbalance his OCO and foreign military sales business and “average up” SOSi’s service offerings: Whereas SOSi continues to realize strong growth overseas — rapidly emerging as among the most viable competitors in the global life support, sustainment and logistics market — its acquisition of STG gives the company a large footprint in the United States, and an impressive array of technical talent anchored by several hundred software developers and systems engineers.
“We enable the legacy STG organization to pursue large network and systems engineering opportunities overseas, and they give us technology qualifications we would have been hard-pressed to develop on our own,” Setian said.
“Our combined strengths, and our flat, streamlined ownership structure, make us a unique and effective choice for many of the government’s largest, most complex programs — after working with us, our government customers quickly realize we actually are different than our competitors; we offer the resources, expertise and global experience of the largest firms in our industry, and the traditional customer-focused approach of a smaller firm,” Setian said.
‘Diamond in Rough’ Opportunity
As it has throughout its history, SOSi saw opportunity where others didn’t.
“We saw STG as a diamond-in-the-rough opportunity — in spite of the difficulties, the fundamentals of the business were still very strong,” said Setian, citing STG’s footprint in high-value domestic market areas, which complemented SOSi’s decades-long experience as an overseas mission and operation support company.
“This [integration]is a classic ‘one-plus-one-equals-three’ opportunity for both entities,” Setian said. “It put us both in a much stronger position to go after larger, more complex, and more exciting opportunities.”
In keeping with that vision, SOSi also recently beat out a well-entrenched incumbent and three other industry competitors, to win a $78 million intelligence analysis and systems engineering contract with the U.S. Army Europe, which serves as a platform to pursue engineering and software development as well as intelligence support opportunities in Europe. “The contract was an important strategic target,” Setian said.
“Even as we make moves to diversify our business — represented most recently by our acquisition of STG — [the contract]reinforces our roots as a mission and intelligence support contractor. It also expands our footprint in Europe, building on similar work we do for the U.S. Air Force, and positions us well for several large upcoming competitions,” Setian said in a recent statement.
At the same time, SOSi stays true to its roots as a family-owned company. The flexibility to do what it wants and to think and plan long term offer a powerful differentiator among its competitors—particularly the large publicly traded integrators and companies beholden to large institutional investors. SOSi, by contrast, is not laden by bureaucratic, short-term decision-making, making it possible to take near-term risks in the interest of attaining longer-term growth and profitability.
“I think that resonates with customers, as we’ve seen the industry undergo an unprecedented level of consolidation,” Setian said. “There’s plenty of room for mid-tier companies like us to grow and fill the void that’s been left by companies looking to scale out of the mid-tier; and we’re more than happy to provide that alternative to their customers.”
With more than a 25 percent growth rates for the past decade and a half, SOSi has traditionally focused on organic growth as the primary driver of its success, but Setian has not ruled out making future acquisitions — so long as they’re at reasonable prices and have real growth potential.
Yet, even as the company has the ability to make another acquisition “relatively soon,” as Setian puts it, SOSi’s leadership team will likely wait out the market.
“We are not in a rush, given the interest-rate environment, and outsized valuations we are seeing for highly commoditized service businesses,” Setian said. “We believe there are deals to be had, but it may take a cycle of acquisitions for them to break loose.”
In the meantime, Setian is content to realize the business and cost synergies of SOSi’s last three acquisitions, and continue building out the company’s intelligence and technology portfolio, alongside its overseas logistics business.
“I attribute our success to our hard-charging culture, and the collective mix of talent and expertise we have on our team,” he added.
Setian gives high marks to the company’s leadership team—“one of the most talented in the industry,” as he calls it.
“I would put my team up against anyone else’s in the industry, large or small — each and every person on my team is experienced, strong and opinionated, which gives me an effective mix of vantage points from which to view all options,” Setian said. “Bruce Crowell, who spent more than a decade at United Technology, before taking the CFO job at a middle-market defense electronics company he eventually took public; Brian Geoghegan, my general counsel, who worked as a deal attorney his entire career and was an entrepreneur in his own right; my sister Pandora— my chief administrative officer — who was a banker with Chase and J.P. Morgan for more than two decades before joining the family business; and John Avalos, my COO, who spent a decade and a half as a senior executive at Booz Allen Hamilton and BAE before joining SOSi, and is one of the most talented, growth-minded executives to emerge in the industry over the past 20 years. Others would be hard-pressed to build a team as formidable as mine.”
“There are a lot of different directions we can take the business,” Setian added. “Regardless of approach, our top priority is to prioritize our offerings based on government needs, and make sure we continue to stay aligned with our customers’ spending patterns, driving hard on both the organic and inorganic growth fronts.”
If the STG acquisition is any indication, that alignment and mindset will continue for some time at SOSi.