Monthly Archives: March 2017

Valuation Drivers: KEYW’s $235M Acquisition of Sotera Defense Solutions

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The federal market is a prime example of an industry where companies have turned to inorganic strategies to drive growth. This is especially true in the lower middle-market contracting community ($50.0 million – $1.0 billion in revenue) where the need to scale to compete in an evolving industry has become more prevalent. KEYW’s recently announced acquisition of Ares Management, L.P. Portfolio Company, Sotera Defense Solutions (Sotera) serves as an excellent case study for owner-operators who are striving to build value in their business.

The publicly disclosed total cash purchase price of $235 million (~9.8x 2017E adjusted EBITDA, net of expected present value of tax benefits*) represents an attractive valuation driven primarily by a number of value drivers inherent in the business combination, which include:

  • Customer Access to Intelligence Community (IC) Agencies: The acquisition of Sotera adds high-priority, new customer agencies to KEYW’s existing IC portfolio (~$176 million in 2017 revenue), including highly sought-after FBI and DHS customers, and creates additional avenues for growth in the DoD market (e.g., Army Intelligence).
  • New and Complementary Capabilities: KEYW’s acquisition of Sotera augments the strengths of each company to create a leading pure-play products and solutions provider, adding new and complementary capabilities in agile software and solution development, cyber security, data analytics, machine learning, and big data. This well-rounded capability will expand KEYW’s reach across the value chain and unlock cross-selling opportunities with existing customers that would have otherwise contracted with the competition for the same product and/or service.
  • Access to a Large Portfolio of Prime Contracts and IDIQ Vehicles: KEYW will gain immediate access to past performance qualifications, customer relationships, and revenue streams of more than 12 prime IDIQ and GWAC contract vehicles. Moreover, the combined company will offer a complete set of enhanced capabilities to new and existing customers utilizing a more powerful and robust business development function.
  • A Unique, IC-focused Provider of Significant Sale: The transaction will create a pure-play IC-focused services provider with an estimated $535 million of pro forma 2017 revenue and $62 million in adjusted EBITDA (~10.0+% adjusted EBITDA margins). The combined company will have over 2,000 skilled employees with ~80.0% maintaining Top Secret clearances and above. The combined scale of both companies will provide a more competitive cost model to drive additional growth.
  • Cost Synergies: A transaction of this size typically generates significant cost synergies associated with the removal of duplicative indirect functions. This transaction is expected to yield approximately $3.5 million of cost synergies within the fiscal year 2017 and a total of $7 to $10 million in expected synergies over the long term.
  • Enhanced Cash Flow Metrics/Realizable Tax Attributes: The combined company is projected to generate roughly $43 million in pro forma 2017 operating cash flow. Expected net present value tax attributes of $46 million will increase net cash flow through a reduction of cash tax expense.

M&A comes with a number of challenges for companies of all sizes. Therefore, it is important for both buyers and sellers to develop a thorough strategy prior to embarking on an M&A event to mitigate uncertainties that emerge during a deal process. Companies should perform financial (e.g. pro forma P&L forecasting, balance sheet management) and organizational (e.g., operations, systems, employees) due diligence to assess potential challenges relating to:

  • Cultural fit (e.g., employee retention);
  • Financial wherewithal (e.g., transaction financing);
  • Contract mix (e.g. small business set-aside/F&O, prime/sub);
  • Revenue synergies (e.g. realizing identifiable synergies pre- and post-closing); and,
  • Effective integration (e.g. operations, systems, employees).

Implementing a clear and well-defined roadmap and assigning accountability for tracking and executing on your M&A strategy will increase the likelihood of a successful transaction in the future.

For questions and more information, please contact Michael D. Potolicchio at

*Ignoring the tax attributes, the 2017E EV/EBITDA multiple is ~12.2x

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