In spite of relatively stagnant growth prospects across the defense and government services market, there are sub markets that continue to experience outsized growth, including Cybersecurity, C4ISR, Data Analytics and Healthcare IT. The forecasted growth in these sub segments is outpacing the broader federal IT outlook and is therefore driving M&A activity. For example, contractors with IT capabilities focused on protecting the nation’s critical infrastructure have realized billions in procurement dollars via the President’s new government-wide cybersecurity initiatives. Furthermore, there were transformative contracts awarded in the C4ISR market during the second quarter, as the Department of Defense (DoD) continues to take aim at developing technologies and supporting operations that disrupt, deter and deny global terrorist activities. Healthcare IT continues to be a strategic focus area as the U.S. government ramps up federal funding in the areas of patient care, fraud and waste reduction, and IT systems integration and cost efficiencies. Finally, big data analytic contractors will benefit from the growth in cybersecurity, C4ISR and Healthcare IT as government agencies will depend on tools that help process, analyze, manipulate and disseminate large datasets in order to make better and more informed decisions.
Federal Initiatives Spawn Cybersecurity Spending and M&A
During the first half of 2016, the U.S. government made significant progress in improving its cybersecurity posture, beginning with President Obama’s Cybersecurity National Action Plan (CNAP) unveiled in early February. The President has requested from Congress an additional 35% in funding for cybersecurity programs which would result in over $19 billion for implementation beginning in 2017. The President called for the creation of a Chief Information Security Officer (CISO) role to lead federal cyber initiatives, which is expected to be filled before the end of the U.S. government’s fiscal year. In addition, the U.S. government has hired 3,000 cybersecurity IT professionals over the past six months, and plans to hire an additional 3,500 professionals by January 2017. The ramp-up in hiring is in response to the increasingly sophisticated and persistent cyber threats that pose strategic, economic and security challenges to the U.S.
The emphasis on cybersecurity is evident in recent award activity. In Q2, the DoD awarded over 30 contracts with a cybersecurity focus. This award data ignores Intelligence Community awards which are infrequently publicly disclosed. Favorable market fundamentals across the cybersecurity market have propelled M&A activity, as buyers target access to new cyber skillsets (e.g., CNA, CND, C&A) or customer access.
Cybersecurity Notable Q2 M&A Activity
Federal Data Systems, Inc. (FedData) Acquires Counterintelligence and Intelligence Business Units of Intelligent Decisions, Inc.
In late May, FedData acquired the business unit from Intelligent Decisions in an effort to expand threat insider and critical infrastructure support for commercial and government organizations. This acquisition extends FedData’s reach into the private sector and expands upon its capabilities in cyber within the Intelligence Community.
Altamira Technologies Corp. Acquires Prime Solutions, LLC
Altamira Technologies acquired Prime Solutions in early May, expanding their portfolio of cyber capabilities. Prime Solutions specializes in System Vulnerability Analysis, Reverse Engineering, CNO Software Development, Network Engineering and Defense, Malware Analysis, and Defensive Vulnerability Analysis.
ManTech International Corporation Acquires the Cyber Business Unit of Oceans Edge, Inc.
ManTech International Corporation acquired Oceans Edge, Inc. in mid-June to expand the Company’s advanced cybersecurity capabilities. The acquisition will add additional vulnerability research, development and analysis capabilities to ManTech, and will position the Company to provide advanced CNO capabilities with sophisticated intelligence and analytics. The acquisition will also increase ManTech’s significant presence in this highly sought after segment of the U.S. government cyber solutions market to include service components of U.S. Cyber Command.
New C4ISR Technologies Drive Q2 Awards
There were a number of sizable contracts in the Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) space awarded in Q2. Harris Tactical Communications was awarded a five year IDIQ worth up to $1.7 billion to provide the US Army with tactical radios and ancillary items in Afghanistan. Lockheed Martin won a $1.8 billion contract with the DLA providing advanced systems support on the F-16, C-5, C-130, F-35, MH-60, P-3, F-22, Patriot Guidance Enhanced Missile, and other weapons systems. This comes on the heels of the Company’s $1.1 billion NAVSEA win at the end of March. In addition, there have been multiple, large contracts awarded that focus on geospatial intelligence and information services, satellite and joint space communications, electronic warfare, radio frequency (RF) communications, and advanced systems engineering technologies that are addressed by only a few select contractors.
Despite billions of commitments to the federal government’s largest contractors, C4ISR opportunities were ample for small contractors as well. Five firms (EOIR, Physical Optics Corporation, S2 Corporation, SI2 Technologies, and Systems Engineering Associates) with under 500 employees were included in the Office of Naval Research’s $900 million Electromagnetic Maneuver Command & Control (EMC2) Program. Meanwhile, more than half of the companies that were awarded seats on the SPAWARSYSCEN COTS C2 contract have less than 200 employees. Accordingly, M&A interest in the C4ISR arena remains robust as demonstrated by two new platform investments made in Q2 by industry focused private equity firms, DC Capital Partners and Arlington Capital.
C4ISR Notable Q2 M&A Activity
Arlington Capital Partners Acquires EOIR Technologies, Inc. from The White Oak Group, Inc.
In late June, advanced C4ISR IT provider EOIR was acquired by Arlington Capital Partners from The White Oak Group. EOIR specializes in advanced electronic warfare technology, including Smart Sensors, Video Analytics and other Intelligence, Surveillance and Reconnaissance technologies. The acquisition gives Arlington a new platform with valuable new contracts at US Army CERDEC and the Office of Naval Research. This acquisition by Arlington follows its successful investment in Novetta Solutions, which it sold to the Carlyle Group in 2015.
DC Capital Partners, LLC Acquires QRC Technologies, Inc.
DC Capital Partners announced in May that they acquired RF hardware and software provider QRC Technologies. QRC develops and produces survey tools for cellular communication systems, phone based measurement, stimulation tools, forensic tools, and integrated RF recording and playback equipment. With QRC, DC Capital has acquired a platform with a proven and experienced management team and a highly skilled workforce that has an established track record of providing advanced Signal Intelligence and Communications Intelligence products.
Enterprise-Wide Adoption of Data Analytics Will Continue in 2016
Government agencies are amassing large amounts of structured and unstructured data, resulting in greater demand for analytics software programs to process information to make better decisions. As the Internet of Things gains even more momentum, the desire to synthesize and process data will drive additional growth in funding across Healthcare, Intelligence / DoD, and other Federal / Civilian agencies.
There was notable contract award activity specifically focused on predictive analytic services and advanced modeling during Q2 2016. For example, Northrop Grumman Information Systems was awarded the Fraud Prevention System – Version 2 award to deliver predictive modeling capabilities for CMS to improve patient care and prevent fraud and waste. In addition, DIA awarded GeoEye Analytics the Management and Maintenance of All-Source Geospatial Predictive Analysis Services to provide their subject matter expertise in gathering, analyzing and manipulating data for geospatial predictive modeling.
Applying data analytics tools will help both agencies and contractors better navigate a rapidly expanding cybersecurity market, converge an increasing number of decentralized ISR systems, and improve patient care and prevent healthcare fraud and waste. Acquisitive strategic buyers continue to realize the power of these tools and growth outlook in these markets as demonstrated in Q2 with IBM’s $2.6 billion acquisition of Truven Health Analytics, Inc. and Jacobs Engineering acquisition of The Van Dyke Technology Group.
Data Analytics Notable Q2 M&A Activity
Jacobs Engineering Group, Inc. Acquires The Van Dyke Technology Group, Inc.
In mid-April Jacobs Engineering made an acquisition to strategically boost their advanced cyber and data management competencies. Van Dyke Technology is an industry leader in identity and access management, threat mitigation and other cybersecurity solutions primarily for the Intel Community.
IBM Closes its Acquisition of Truven Health Analytics, Inc.
In early April, IBM Watson Health closed on its acquisition of Truven Health Analytics, a leading provider of cloud-based healthcare data, analytics and insights. IBM’s health cloud now houses one of the world’s largest and most diverse collections of health related data, representing an aggregate of approximately 300 million patient lives. IBM plans to integrate Truven’s extensive cloud-based data set spanning hundreds of different types of cost, claims, quality and outcomes information with its existing data sets.
Patient Care and Efficiency Take Center Stage
Healthcare agencies continue to prioritize patient care, fraud and waste reduction, and IT cost efficiencies. In fact, the 2015 HHS Financial Report estimates that from 2014 to 2018 over $75 billion will be wasted annually on improper benefits payments. In May, CMS awarded seven positions on the Unified Program Integrity Contract (UPIC) Program. Contractors on this program will support CMS to detect, prevent and deter risks and vulnerabilities of the Medicare and Medicaid programs. Awardees were selected for their ability to upgrade CMS’ outdated billing approaches along with innovations in electronic health records (EHRs).
To improve the patient to provider experience CMS has developed the Federal Healthcare Exchange alongside Medicare and Medicaid. The new Strategic Partners Acquisition Readiness Contract (SPARC) is the recompete of the predecessor Enterprise System Development (ESD) contract and tasks contractors with planning, designing, developing, testing, implementing, coordinating, and maintaining the software behind the communication technologies. The $25 billion program will integrate innovative IT concepts such as agile software development, and has a significantly higher ceiling that the $4.0 billion ESD vehicle.
Healthcare Notable Q2 M&A Activity
DLH Holdings Corp. Acquires Danya International, Inc.
In early May DLH Holdings announced the acquisition of Danya International, Inc., a provider of monitoring and evaluation services. The Silver Spring, MD based company provides monitoring, compliance, valuation, communications, training, and technical assistance services primarily to federal health customers. Danya works on the flagship prime supporting the HHS’ Head Start program for monitoring and evaluation of grants, along with four other IDIQ vehicles supporting HHS or CDC.