By Jason Rigoli, Principal at The White Oak Group

Following economic uncertainty and a drought in available funding had led to fewer mergers and acquisitions in the defense and government contactor sector over the past several years. However, the market is poised and ready for an uptick in M&A activity.

As the economy continues to stabilize and budget priorities are clarified, M&As are expected to gain momentum throughout 2010 for government contractors. In fact, this uptick is beginning to take flight.

According to a recent article in Washington Technology, several positive themes are starting to emerge that point to M&As in the government contractor space increasing in 2010. According to the article, these themes include:

  • Prospects remain bright for federal information technology spending. History has shown that in tight budget environments IT spending can increase as the government looks for ways to do more with less, as occurred during the Clinton administration.
  • Preventing and deterring future conflicts-of-interest divestitures is a primary strategic objective as the Pentagon seeks to eliminate potential conflicts of interest within government contractors. According to a Washington Post article earlier this week, Lockheed Martin recently decided to divest its Enterprise Integration Group, which provided systems engineering and integration services. This will result in more businesses being put up for sale. In addition, because large government contractors are seeking to avoid new conflicts, non-traditional buyers, such as private equity firms and commercial IT businesses, may play a larger role in this market.
  • Insourcing isn’t as easy as it sounds. It is a monumental task for the federal government to recruit a workforce with the talent and expertise to meet its growing and increasingly complex technical needs.

While it will take time before government contractor M&A sees a full recovery in activity, this is positive news for the sector.

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