Building Shareholder Value in Today’s Defense and Government Services Market
Please join Aronson Capital Partners on October 31st for a webinar that covers the current state of the defense and government services M&A market and ways for management teams to build shareholder value in advance of an exit. The current budgetary environment has created new challenges and opportunities for government contractors, and our online presentation will focus on strategies to better position your business.
Topics will include:
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IT Security Requirements for Government Contractors – Part 1
FISMA Compliance Oft Overlooked for Government Contractors – November 13th
Government contractors that house or have access to government data may be subject to Federal Information Security Management Act (FISMA) requirements. In fact, many contractors have FISMA compliance clauses in their contracts but may not understand them or even know they are there. Identifying and understanding contract clauses that require FISMA compliance is a
challenging, but necessary part of effective contract management. Noncompliance may result in fees or fines, loss/termination of the contract, or, worst of all, a security breach in your system(s).
Click HERE for more details and to register.
Affordable Care Act Basics for Government Contractors
Confused by the provisions of the Affordable Care Act? You’re not alone. Many government contractors are concerned about the impact of this new law on their business. Please join us on November 12th for a breakfast briefing on the specific aspects of the ACA that are most relevant to small government contractors. Presenters Mark Flanagan of Aronson LLC and Ronald Sroka from Evolve Consulting Group, Inc. will share their expertise on important topics that include:
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As M&A valuations have declined for the majority of the Defense and Government Services market over the past five years, the adoption of Employee Stock Ownership Plans (“ESOPs”) is becoming a more viable partial exit strategy. Many business owners who are exploring a near term liquidity event are looking to ESOP transactions if an M&A exit is not feasible, or does not generate the appropriate valuation. A leveraged ESOP provides management and employees with a stake in the business, while providing liquidity to owners, often in a tax favorable manner.
Click here to continue reading this article, located in Aronson Capital Partners’ June Market Update.
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.
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.