Tag Archives: deals

A Tale of Two Acquisitions

KBR Inc. (KBR), the Houston-based construction and engineering firm, expanded its Government Services segment in 2016 with two sizable acquisitions. KBR acquired Wyle Inc. (Wyle) for approximately $600 million in July, and then acquired Honeywell Technology Solutions Inc. (HTS), which is based in Columbia, Maryland for approximately $300 million in September. From a business combination accounting perspective, one might expect these two deals to look very similar. However, a look at KBR’s financial statement disclosures for each transaction reveals significant differences.

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A few things jump out when you compare the purchase price allocations side-by-side. For one, in the Wyle acquisition goodwill represents a much higher percentage of purchase consideration than in the HTS acquisition. In terms of purchase price allocation mechanics, goodwill is a residual value and represents going-concern elements that don’t meet the criteria for separately recognized assets. But what specific things can we point to in these two acquisitions? We know that the value associated with operational synergies (each deal cites “growth opportunities based on a broader service offering of the combined operations” as primary goodwill components), and assembled workforces are subsumed within goodwill, so perhaps one or both of these were of greater value in the Wyle transaction. Deferred taxes, which are not measured at fair value, also have an impact on the reported goodwill amounts.

In the Wyle acquisition, $48 million of the purchase consideration was allocated to trademarks and trade names, whereas in the HTS acquisition no value was allocated to trademarks and trade names. This is likely explained by the nature of the HTS transaction, which was a divestiture by Honeywell International Inc. The “Honeywell” name was retained by the parent company.

Another observation relates to working capital, which comprised almost one-fourth of the purchase consideration in the HTS acquisition, but less than one-tenth of the purchase consideration in the Wyle acquisition. Perhaps the nature of the HTS business is such that it requires higher working capital levels to operate compared to the Wyle business.

If you find the questions raised above interesting, you may want to check out an upcoming Aronson webinar. Later this month we’re conducting a one-hour session for clients and friends where we will explore business combination accounting and purchase price allocations. Click here for more information.

Aronson LLC’s Financial Advisory Services practice assists clients in a variety of industries with numerous M&A-related activities, including pre-acquisition due diligence and post-acquisition purchase price allocation analyses and impairment testing. To learn more click here or contact Bill Foote at 301.231.6299.

What Drives Value in Government Services & Defense M&A?

M&A transaction volume in the government services & defense market in recent periods has trended upward. There were 112 government services & defense acquisitions in 2015, compared to 82 and 79 acquisitions in 2013 and 2014, respectively. There were 31 acquisitions in the space for Q1-2016, which was a significant increase over Q1-2015 activity.[1]

So what are the target company attributes that spark interest from potential buyers and influence valuations the most in these deals? Specific value drivers vary from company to company, but some common themes for government services & defense firms include:

  • Strong, long-term relationships with government customers
  • Services/capabilities that are sought after in higher-priority markets (e.g., cyber security, data analytics, healthcare IT, C4ISR)
  • Significant contract backlog (prime contracts, unrestricted, substantial funding) that yields clear revenue visibility
  • Access to large, prime IDIQ vehicles (e.g., GSA Alliant and OASIS, DIA SITE / E-SITE, VA T4 / T4NG, CMS ESD / SPARC)
  • Specialized workforce with security clearances or certifications in cutting edge COTS solutions
  • Distinguished technology or revenue-producing intellectual property

While this is not an exhaustive list, attributes like the ones cited above tend to impact a firm’s growth prospects and its capacity for sustaining profitable operations. These attributes may also provide an acquirer with opportunities to penetrate new markets and maximize pre-existing customer relationships.

Interestingly, these value drivers may be visible on the acquirer’s balance sheet after the deal closes. For financial reporting purposes, the acquirer must allocate the purchase price among the assets acquired and the liabilities assumed from the target company, at fair value. How the purchase price is allocated can be indicative of a target company’s value drivers. In order to explore this concept, we looked at acquirer business combination disclosures for approximately 30 deals occurring from Q1-2015 through Q1-2016 in the government services & defense market (see table below).

While every transaction is different, we found that on average 28% of the purchase consideration in these acquisitions was allocated to identifiable intangible assets and 67% of the purchase consideration was allocated to goodwill.[2] Most common among the identifiable intangible assets were customer-related assets (i.e., contract backlog and customer relationships), which accounted for as much as 39% of the purchase consideration in the deals analyzed (average 21%).[3] While less common, value was also allocated to technology-related assets in a number of the transactions studied; these assets accounted for as much as 33% of the purchase consideration (average 11%). But what about workforce-related assets, you may be wondering. Accounting standards require the value of the acquired workforce to be subsumed within goodwill.[4]

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It may also be interesting to consider the useful lives assigned to customer relationships and developed technology. In the deals we studied (see table above), customer relationships were to be amortized over periods ranging from 8 to 20 years (average 13). Amortization periods for developed technology ranged from 4 to 15 years (average 8).

A final note with respect to customer-related assets. Middle market government contracting firms should be aware of recent standard setting activity in this area by the Private Company Council (“PCC”) that affects business combination accounting. For more information, click here.

Aronson LLC’s Financial Advisory Services practice assists clients in a variety of industries with numerous M&A-related activities, including pre-acquisition due diligence and post-acquisition purchase price allocation analyses and impairment testing. To learn more click here or contact Bill Foote at 301-231-6299.

[1] Source: Aronson Capital Partners Q1 2016 Market Update. Click here to read in full.

[2] Under business combination accounting, identifiable intangible assets (i.e., those that are recognized apart from goodwill) generally fall into the following broad categories: marketing-related; customer-related; artistic-related; contract-based; technology-based. Goodwill is a residual value, generally representing the excess of the purchase consideration over the aggregate fair values of the identifiable assets acquired net of the liabilities assumed.

[3] In some instances the values of customer relationships and contract backlog were disclosed on a combined basis; in other instances the values of customer relationships and contract backlog were disclosed separately.

[4] The financial statement disclosures don’t reveal how much of the reported goodwill relates to the workforce. The majority of the reported goodwill, however, tends to be attributable to (something along the lines of) “expected synergies from combining the operations” of the acquirer and the target.

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