Tag Archives: M&A

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 mpotolicchio@aronsoncapitalpartners.com.

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

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2016 Recap: Focus on Higher Margin Business Segments

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A total of 92 M&A transactions were announced in the defense technology and government services market in 2016, which was slightly below the 107 transactions completed in 2015, but in-line with 2013 and 2014 levels. M&A in 2016 witnessed a “normalization effect” after the flurry of activity that occurred in 2015. Contractors have started to notice the effects the 2013 and 2015 Bipartisan Budget Acts’ sequester relief has had on the overall procurement environment. This relief has allowed the Department of Defense to significantly reduce the amount of anticipated cuts in technology operations and maintenance, translating into strong performance across the defense technology and government services market. As a result, there was active participation across the entire buyer landscape in 2016, driven primarily by (i) private equity sponsors acquiring scalable platform targets and/or “doubling down” with add-on acquisitions that provide complementary capabilities to their existing platform companies, (ii) larger Tier-1 and Mid-Tier’s divesting noncore, low margin assets and focusing more on higher margin business segments aligned with the mission, and (iii) Non-Traditional buyers focusing on targets in high priority end markets in order to strengthen their capabilities, expand market share and add new customers.

The strengthening of the budgetary environment and positive sentiment in the government services public equity markets has enabled private equity firms to remain active in the space. Private equity buyers led 33% of the transactions, including new market participants Chart Capital (acquisition of Fed Data Systems), and Platinum Equity (acquisition of PAE from Lindsay Goldberg). Meanwhile, seasoned investors in the sector, DC Capital and Arlington Capital, both secured new government services platforms earlier in 2016 with the acquisitions of QRC Technologies and EOIR Technologies, respectively. Existing private equity backed platforms drove 21% of the private equity activity, as Arlington Capital continued its buying spree by acquiring ISS and PROTEUS Technologies and merging it with EOIR Technologies to form Polaris Alpha. In addition, Belcan, LLC (acquisition of Intercom Consulting and Federal Systems Corp), Preferred System Solutions (acquisition of Synaptic Solutions, Inc. and Tetra Concepts), Sirius Computer Solutions (acquisition of Force 3, Inc.) and Altamira Technologies Corporation (acquisitions of APG Technologies and Prime Solutions) all strengthened their portfolios with bolt on acquisitions. Lastly, private equity firms continue to utilize the favorable budget environment to exit their existing investments. Examples include the sale of Aquilent (backed by Warwick Capital since 2002) to Booz Allen Hamilton, Camber Corporation (backed by New Mountain Capital since 2008) to Huntington Ingalls Industries, Vistronix (backed by Enlightenment Capital since 2013) to ASRC Federal and PAE (backed by Lindsay Goldberg since 2011) to Platinum Equity.

Mid-Tier and Tier-1 contractors continued to reshape the federal government contracting industry with notable M&A deals in 2016. Leidos’ $5.0 billion acquisition of Lockheed Martin IS&GS earlier in 2016 has catapulted the SAIC mission focused spin-out into the largest mid-tier publicly traded Government Services focused contractor ($10.7 billion in enterprise value as of December 31st, 2016) and allowed them to effectively compete for even larger contracts sought after by Tier-1 defense contractors. In addition, ManTech Corporation acquired the Cyber Network Operations Practice of Oceans Edge in June 2016, to expand upon its vulnerability research, development and analysis capabilities and Edaptive Systems, LLC in December 2016 to strengthen its federal healthcare presence. Booz Allen Hamilton acquired digital and cloud services provider Aquilent for $250 million to strengthen its capabilities and enhance its presence within HHS. Finally, Tier-1 contractors, Boeing and L-3 have made the strategic decision to focus on their autonomous systems and collaborative robotic capabilities with the acquisitions of Liquid Robotics and MacDonald Humfrey, respectively. In addition, L-3 officially changed its name from L-3 Communications to L-3 Technologies in order to capitalize on its strong brand equity, while better reflecting the Company’s evolution into a leading global provider of technology solutions.

As shown in the table, the 2016 buyer mix continued similar trends when compared to 2015, with public strategic buyers representing the largest buyer group (35.0% of all M&A activity). However, this year it was mainly driven by non-traditional buyers making transformative acquisitions to strengthen capabilities in areas of funding priority, gain customer access, and expand their contract portfolios. These buyers in 2016 included KBR (Wyle and Honeywell Technology Solutions, Inc.) Huntington Ingalls Industries (Camber Corporation), Magellan Health, Inc. (Armed Forces Services Corp.) DLH Holdings Corp (Danya International, Inc.) Jacobs Engineering Group, Inc. (The Van Dyke Technology Group) and Ball Aerospace and Technologies (Wavefront Technologies). The non-traditional buyer activity over the past twelve months bodes well for the industry as it signals renewed confidence in the overall growth prospects of the federal market.


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Before & After the Deal – What Middle Market CFOs & Controllers Need to Know Part 2: After the Deal

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M&A transactions are major undertakings that can require a thorough due diligence process. But that’s only part of the story — once the deal closes there are a number of other considerations that CFOs and Controllers must wrestle with. In Part 1 of this two-part webinar series we explored pre-acquisition due diligence. Now, in Part 2 our high-level overview of the M&A process continues with a look at post-acquisition considerations including business combination accounting and disputes. Please join us on December 13, 2016, at 11:00 a.m.

Learning Objectives:

  • Identify key focus areas for due diligence in M&A deals
  • Improve your knowledge of the accounting standards applicable to M&A transactions, including certain alternatives for private companies
  • Explore how the purchase price in an M&A transaction is allocated to the assets acquired and liabilities assumed, including the valuation of intangible assets

Who Should Attend?
CFOs and Controllers

Speakers include Aronson LLC Partner Bill Foote, and Aronson LLC Manager Jimmy Zhou.

Register to attend and recieve CPE Credit. Webcast participants can earn up to 1 CPE credit in the Management Advisory Services field of study.

CPE-related Information
Delivery: Group-Internet Based
Program Level: Basic

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Preparing your Company for Sale: Key Value Enhancing Strategies

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GovConnects Continuing Education Series

For many entrepreneurs, the ownership stake in the business represents their most significant personal asset. Business owners spend significant time and effort managing and growing their businesses. Often times, however, when it comes to selling the company, emotional attachments and lack of focus can hinder the process, and sometimes kill a deal.

Join GovConnects on May 12, 2015 at Loyola University, where a panel of experienced professionals will discuss strategies for preparing you and your business for sale, how to enhance the value of your business, key negotiation strategies and more. Phil McMann of Aronson Capital Partners will participate on the panel.

To learn more and RSVP, click here.

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Market Update – Consolidation of Mid-Size Contractors

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Budget Stabilization and Market Consolidation

The last five years of uncertain federal budgets have prevented most contractors from making significant investments, incentivizing them to return capital to shareholders. However, as budgets have stabilized (on a relative basis), the larger contractors are now able to make investment decisions with greater clarity. While there is overall better revenue visibility across the sector, the Defense budget is flat and the overall sector is perceived to be a slow growth industry. Therefore, we expect the recent mid-tier consolidation trends exhibited over the past 12 months to continue, with private equity backed targets being the primary acquisition candidates in this consolidation cycle.

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