By Jason Rigoli, Principal at The White Oak Group
The ongoing economic issues plaguing the business community have led to many companies tightening their belts and stockpiling cash in case the economy dips back into recession. This has led to a decrease in the amount of mergers and acquisitions, as well as a decline in hiring and corporate expansion; even in Washington, D.C., where the hot markets such as healthcare IT and cyber security have kept the economy relatively strong.
Despite this recent dip in M&A and corporate growth, pundits are expecting a fast and furious about-face. According to a recent Forbes article by Loren Thompson, the Chief Operating Officer at the Lexington Institute, a public policy think tank based in Arlington, Va., the defense industry is poised to see some acquisitions in the very near future.
According to Thompson, the current political climate and a reduction in military spending could lead to a round of M&A. However, this time could be far different to what was witnessed after the Cold War in the early 1990s, where the cancellation of major defense programs led to many companies exiting the market, and a larger contraction of the industry resulting in a handful of large conglomerates that competed with each other for the remaining contracts.
This time around, as defense budgets are slashed, expect large conglomerates to tighten their belts and streamline operations while small and medium-sized companies aggressively try to sell while valuation is high. With the government most likely to stand in the way of any further contraction in the industry, it’s more likely that the large companies will instead acquire smaller companies in niche markets in an attempt to further fill out their portfolio of services.
What does this all mean? The market is right for significant M&A activity, with large companies having much of their assets in cash and looking to invest, defense contracts dwindling and small companies looking to sell before their valuation falls. If this plays out like Loren Thompson expects it to, expect some smaller companies in the cybersecurity space, and other hot markets, to soon be acquired by your large government contractors.
If you’re a small company and think you might be an acquisition target, check out our recent posts about how you can make your company more valuable, and ensure a smooth M&A experience: