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Financial Sponsors – Continued Interest in Government Services

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Over the last five years, the Government Services industry has seen continuous interest from financial sponsors. Private equity firms have acquired publicly-traded services providers (e.g., Providence/SRA; Ares/GTEC), divestitures of large systems integrators (e.g., Veritas/The SI; General Atlantic & KKR/TASC), and both middle and small market contractors (e.g., Arlington/White Oak Technologies; LLR/Paragon). In 2012, private equity firms and their platforms accounted for one-third of the acquisition activity within Government Services. Financial sponsors are expected to continue to play a significant role in the Government Services M&A market as contractors (public and private) seek new opportunities to grow in an environment of sequesters, budget cuts, and funding uncertainty.

The Draw of Government Contracting

Financial sponsors like predictable cash flows and large addressable markets. Compared to the commercial sector, federal contractors have relatively high revenue visibility and backlog and enjoy greater confidence in their ability to collect pending customer payments. In addition, the sector is highly fragmented with opportunities for industry consolidation to either enhance an established contractor’s capabilities/customer base via bolt-on acquisitions (e.g., Camber/Novonics), or to roll-up several small companies and form a more competitive contractor with greater scale and ability to meet customer needs (e.g., Arlington/Novetta).

The Need for Financial Sponsors

As the market environment continues to evolve, opportunities become available for those with capital. After being acquired by Ares Management in 2011, Sotera Defense Solutions (formerly GTEC) President and CEO John Hillen said, “Being a part of that investor group gives us access to a lot of capital to do more and bigger deals than we could as a public company.” Within a year of the change in ownership, Sotera outbid its competitors to acquire Software Process Technologies and Potomac Fusion. With flattening growth and shrinking market sub segments, several contractors are leaning towards a more active M&A strategy as a key avenue to grow revenue streams in priority markets.

Deal Mechanics of Financial Sponsors

Borrowing capacity and cash balances have increased for many public contractors since last year, but M&A deals in 2013 have been sparse. Sequestration, budgetary concerns, the debt ceiling, and other topics on the Hill have increased uncertainty in today’s market. As a consequence, the gap between buyer and seller valuation expectations has widened. In this environment, financial sponsors have an important role to play through structuring instruments like earnouts, equity rollovers, and seller notes. These instruments are typically less likely to be included in a strategic buyer’s consideration, or at least to a lesser degree. Forms of consideration that provide paths for additional value through structure may be the only way to bridge the gap between buyer and seller expectations in the current environment.

This article is contained in ACP’s April Market Update.

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Forbes: “As Budget Cuts Bite, Defense Contractors’ Fortunes Diverge”

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While federally-focused service providers have been hit hard in recent times, weapons systems integrators have not been immediately impacted. Large weapons systems programs are more difficult to cut than IT and training contracts. This has allowed weapons manufacturers to focus on longer-term margin expansion strategies as service providers downsize and restructure.

Click here to read the entire article from Forbes.

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November Defense Federal Technology Market Update

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We invite you to read our November 2012 Newsletter, featuring the following topics:

*Defense Contractors Build Up Cash Balances

*Selected M&A Transactions

*Industry Updates

*Government Services Index Performance and Valuations

*Public Company Comparables

*Recent Industry M&A Transactions

Click here for a complete pdf file of the newsletter: ACP Monthly M&A Update – November Edition

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October Defense Federal Technology Market Update

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We invite you to read our October 2012 Newsletter, featuring the following topics:

*Healthcare IT Spotlight: Next Generation Initiatives at VA

*Selected M&A Transactions

*Industry Updates

*Federal Sector Index Performance and Valuations

*Public Company Comparables

*Recent Industry M&A Transactions

Click here for a complete pdf file of the newsletter: ACP Monthly M&A Update – October Edition

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September Defense Federal Technology Market Update

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We invite you to read our September 2012 Newsletter, featuring the following topics:

*Healthcare IT Spending Analysis

*Selected M&A Transactions

*Industry Updates

*SAIC Spinoff Update

*Federal Sector Index Performance and Valuations

*Public Company Comparables

*Recent Industry M&A Transactions

Click here for a complete pdf file of the newsletter: ACP Monthly M&A Update – September Edition

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