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Government contractor acquisition activity picks up

July 26, 2010 By ei2admin

After an uncertain economy and a drought in available capital curbed acquisition activity in the government contracting marketplace, analysts and companies say they now are seeing an uptick — if not dramatic change.

Take Arlington-based CACI, a major services and information technology provider in the defense and intelligence fields, which has long depended on acquisitions for expansion. According to Paul M. Cofoni, president and chief executive, about one-third of the company’s growth has generally come through acquisitions.

However, the company “took a little pause” in recent months because of instability in the capital markets.

Now, “we’ve reenergized,” Cofoni said. “We’re back at it full force.”

With $200 million in cash and about $400 million in borrowing power at the ready, CACI has several candidate companies in mind. The firm is looking for high-growth, high-margin businesses, particularly within the burgeoning cyber, energy and health-care markets.

Smaller companies, too, say they’re looking. Andover, Mass.-based information technology firm Dynamics Research — which has close to 600 employees in Washington — is also seeking fast-growing companies in emerging growth areas such as like health care and cybersecurity, said chief executive James P. Regan.

“We are seeing a definite increase in the availability of properties to be acquired,” Regan said.

Supply and demand are roughly equally matched at this point, said William F. Farmer, co-head of Lazard’s aerospace and defense group in Washington.

A potential seller is Arlington-based Homeland Security Capital — which provides technology for dealing with nuclear, environmental and disaster relief scenarios. The company announced last month that it is exploring “strategic options,” including potentially selling off two of its subsidiaries or making new acquisitions.

C. Thomas McMillen, a former congressman and the company’s chief executive, said business remains strong but that the company needs to rethink its size.

“In those instances where we compete, scale is very important,” he said.

The key to seeing more deals take place is matching buyer and seller expectations, because buyers now expect a bargain, said J. Scott Hommer III, a government contracting attorney with Venable.

“I think there’s a lot of ready, willing and able buyers out there,” he said. “What you don’t have is the sellers’ expectations kind of catching up with the buyers’ expectations.”

Some have already acted. Argon ST — which had lingered on the market for about six months — was recently snapped up by Boeing for $775 million. The purchase follows Boeing’s purchase of Digital Receiver Technology of Germantown in late 2008, and boosts Boeing’s intelligence-collecting capabilities, said Michael S. Lewis, a defense analyst with BB&T Capital Markets.

A potential factor in acquisition activity is conflict-of-interest divestitures — such as Lockheed Martin’s recent decision to divest its Enterprise Integration Group, which provided systems engineering and integration services.

The Pentagon is seeking to eliminate potential conflicts of interest within government contractors — conflicts created, for example, when the same company selected to build a system is also retained to evaluate or test the work.

Lewis said the new focus on conflicts may mean more businesses are for sale. Additionally, because large contractors are seeking to avoid new conflicts, nontraditional buyers such as private equity firms and commercial IT businesses may play a larger role in the market, he said.

While acknowledging a pickup in activity, analysts and investors alike cautioned that it will take time to see a full recovery.

“It’s not going to be flipping a switch,” Hommer said. “It’s going to take time, and by time, I don’t mean days or weeks but months or maybe yet another year [until] the sellers’ expectations line up more with the buyers’ expectations.”

— by Marjorie Censer – The Washington Post – July 12, 2010

Filed Under: Contracting News Tagged With: conflict of interest, federal contracting, government contracting, government trends, technology

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