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:
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 Act’s 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 we enter Fiscal Year 2017, we expect to see similar trends in M&A, fueled primarily by better visibility in the budget and continued emphasis of future federal funding priorities brought on by the new Trump Administration. Read the entire Quarterly Newsletter here to review the following topics more thoroughly discussed:
In spite of relatively stagnant growth prospects across the defense and government services market, there are sub markets that continue to experience outsized growth, including Cybersecurity, C4ISR, Data Analytics and Healthcare IT. The forecasted growth in these sub segments is outpacing the broader federal IT outlook and is therefore driving M&A activity. Read the entire Q2 2016 Newsletter here to review the following themes more thoroughly discussed:
Aronson Capital Partners is a leading middle-market investment bank focused exclusively on the government services and technology industry. Please feel free to contact one of our principals below with any questions.
If you own a small, profitable business and are looking for an alternate exit strategy, an employee management buyout via a leveraged Employee Stock Ownership Plan (ESOP) might be ideal for you. For general background information on how an ESOP buyout mechanically works, including the financing arrangement intricacies, please visit the National Center for Employee Ownership (NCEO).
Now, if you are interested in exploring this strategy, the process should begin with a self-assessment of your overall business model including your tolerance for risk. Enumerated below, is a preliminary list of characteristics and attributes that must be applicable to your particular business model and; more importantly, must be aligned with your overall personal risk tolerance.