Banker: Don’t look for ‘meaningful billion-plus acquisitions’ in federal contracting
Posted on: January 18, 2016

Whether it was Lockheed Martin Corp.’s (NYSE: LMT) $9 billion purchase of helicopter-maker Sikorsky Aircraft or even CACI International Inc.’s (NYSE: CACI) announced $550 million purchase of L-3’s National Security Solutions business, 2015 was awash with big-ticket acquisitions in the government services space.

Analysts still foresee busy M&A activity in the coming months, but they don’t see a flurry of billion-dollar transactions coloring the landscape. Rather, it’s more likely that 2016 will be the year that big acquirers such as CACI, Lockheed and McLean-based Science Applications International Corp. (NYSE: SAIC) begin “ingesting” these companies.

That’s what Jonathan Kirkland, senior vice president of aerospace, defense and government at investment bank Houlihan Lokey, told me he expects to see over the next six months to a year. Except for perhaps a couple of deals near the beginning of the year — the anticipated Lockheed government IT spinoff, for example — Kirkland said he “can’t think of any meaningful billion-plus acquisitions” dominating the scene.

Rather, expect those acquirers to “start cleaning up their portfolios.” That means assessing the market environment, removing any business segments not core to the company, and looking to plug any capability holes through smaller “tuck-in” acquisitions along the same lines as McLean-based Booz Allen Hamilton Inc.’s (NYSE: BAH) purchase of agile software development shop Sparc LLC in November.

“That market has always been there but I think it has taken a backseat to the bigger headline deals over the last twelve months or so,” Kirkland told me. “You’re still going to see deals in that vein and it probably will be a growing presence.”

Companies will also look to rid themselves of “organizational conflicts of interest” — OCIs. In other words, they will look to shed business segments that would put them in a position to advise a government agency on certain products and services while at the same time providing those products and services. This came from contracting reform proposed under President Barack Obama that, in effect, bars contractors from awarding themselves.

Engility, for example, sold a contract as it was integrating TASC that constituted such a concern, CEO Tony Smeraglinolo said in an August earnings call.

M&A will likely pick back up after this portfolio cleanup and, in the next 12 to 24 months, Kirkland said deal activity will begin to focus more on “mid-tier” players — typically private equity-owned companies generating between $100 million and $500 million in yearly revenue.

Some particularly intriguing names came up in my conversation with Kirkland.

Herndon-based LGS Innovations, which is owned by a private equity team that includes Madison Dearborn Partners and CoVant, was one such company. LGS, which provides network infrastructure for the U.S. Department of Defense and the intelligence community, is among a group of companies that “have been growing nicely organically and augmenting it with selective M&A activity.” In October, LGS purchased Dulles-based Axios Inc.

Read the full article here: http://www.bizjournals.com/washington/morning_call/2016/01/banker-dont-look-for-meaningful-billion-plus.html

Want to know more?
CONTACT OUR TEAM
Ready to grow your career?
apply today

Hide Form -