Tag Archives: Valuation

M&A Activity: 2014 Summary & 2015 Outlook

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2014 M&A Recap:

With 81 M&A deals announced in the Government Services market, transaction activity in 2014 increased by 25% compared to 2013 and was in-line with 2012 levels. Improved revenue visibility and better Dealsunderstanding of the new environment was a key factor to this volume increase. For public strategic buyers, higher company valuation, increased dry powder, and an attractive credit market contributed to the pickup in transaction volume. Similarly, well capitalized private and private equity-backed contractors deployed  cash on their balance sheet and accessed the credit market to participate in the M&A market. Private equity sponsors remained active as they looked to invest a sizable amount of un-deployed private equity and traditional bank capital. Access to lower middle market leverage multiples combined with low interest rates contributed to the increase in M&A transactions.

In addition to M&A transactions, a continuing trend in Government Services market was the major divestitures and spin-offs of business segments. Rationale behind most of these transactions was to focus on core markets and capabilities, portfolio reshaping and to unlock value. Notable transactions of 2014 included QinetiQ’s sale of its North American business and Exelis’ spin-off of its Mission Systems

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Valuation from a Public Strategic Buyer

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Introduction

At the end of June, two acquisitions of mid-size intelligence companies were announced by Tier 1 strategic buyers. On the 27th, Boeing announced that it had completed the acquisition of Ventura Solutions, a hardware and software businessman hand touch virtual graph,chart, diagramengineering firm with a focus on open source community support.  Later that week, Lockheed Martin announced the acquisition of Zeta Associates, a leader in the intelligence collection and processing. Although the timeline of these two transactions was coincidental, they demonstrate an interesting trend in the industry: Tier 1 strategic buyers are once again pursuing access to innovative and propriety technology solutions that they expect to leverage across a broader portfolio of existing Intelligence Community and Department of Defense customers.

Boeing Acquires Ventura Solutions

Ventura Solutions, based in Annapolis Junction, Maryland, is a hardware and software engineering company leading the development of the REDHAWK framework and applications. REDHAWK is a software-defined radio (“SDR”) framework designed to support the development, deployment, and management of real-time software radio applications. Philip McMann of Aronson Capital, who advised Ventura in the sale, said, “The level of interest we

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Valuation in the Eye of the Buyer

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Introduction

In a sale process, all sellers want to maximize the value of their business, so it is important to have a perspective of
how buyers look at and substantiate a valuation. Buyers look at many factors when calculating the appropriate purchase price in an acquisition. Valuation methodologies such as Discounted Cash Flow analyses (“DCFs”) (a strategic-buyer-challengecommon calculation that determines the present value of projected future cash flows) consider a large number of variables such as projected growth rates, margin performance, and calculated risk factors. These factors are largely subjective, are impacted by a number of company-specific characteristics, and are most often interpreted differently by different prospective acquirers. This method allows the buyer to model various assumptions and business cases

There is also a more simplistic approach for approximating valuation that does not immediately require detailed long-term financial projections and assumptions. A common equation utilized by buyers in the government services

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Valuation Drivers in CACI’s $820M Announced Acquisition of Six3 Systems

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CACI International’s recently announced acquisition of GTCR portfolio company Six3 Systems (“Six3”) represents the largest Government Services transaction since General Dynamics’ 2011 acquisition of Vangent. Despite unprecedented budgetary pressures for the government contracting community, the publicly disclosed 13.4x TTM EBITDA valuation for Six3 is also one of the higher multiples in our space over the past few years. The rich valuation is driven by a confluence of Six3’s attributes that can serve as an excellent case study for owner-operators who are striving to build value in their own business.

Our analysis of this transaction points to the following value drivers:

  • Market Positioning –> Six3 is exclusively focused on priority markets that are perceived to be more insulated from budgetary pressures. Cyber Security represents approximately 20% of the target’s revenue, while C4ISR and Intelligence make up the remaining 80%. Six3 derives 75% of its revenue from the Intelligence Community with the remainder from DoD.
  • Prime Contract Portfolio –> 80% of the revenue stream is derived from prime contracts, without any reliance on small business set aside revenue or other preference awards. Six3 has a diversified revenue mix with no contract making up more than 10% of revenue.
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