With talk of reducing federal expenditures by $1.2 trillion over the next decade, half of which are geared at defense cuts, government contractors are seeking to shift their priorities in order to remain competitive in the public sector. When similar budget cuts have occurred in the past, there was an increase in M&A activity as larger companies acquired smaller firms in the government contracting market.
This was just one of the trends that a panel of experts discussed in a recent article in Financier Worldwide.
In my previous experience in this type of market, budget cuts simply mean it’s more cut throat out there for companies. The battle for available budget dollars becomes more heated and having key capabilities in high priority areas will be vital for companies moving forward.
It’s for this reason that M&A activity actually increases in the government contracting market when federal spending is slashed.
As Craig King, partner at Arent Fox LLP noted in the article, contractors seek new business deals that bolster their portfolio of offerings with the capabilities needed to maintain some portion of the dwindling government programs and funds.
Small companies with highly valued intellectual property, technologies and product offerings that the government is focused on have the potential to not only survive but flourish in these environments. Such capabilities are also what attract potential buyers for companies looking to sell. M&A activity will increase and remain very active as larger government contractors begin to snatch up smaller companies that can bolster their portfolios with needed services.
But what are these hot capabilities and focus areas?
One focus area in particular that is currently high on the governments radar is cyber security. Cyber crime is increasing exponentially and new legislation is forcing organizations, government agencies and private enterprises to strengthen their security postures. Companies that can offer security services that meet agencies’ needs will have a significant edge over their counterparts.
But cybersecurity is only one hot area primed for government investment. Big data, data analytics, mobility solutions and other cost-saving technologies that cut recurring costs over time for the federal government are all expected to see continued investment despite slashed federal budgets.
Cuts to government spending create a more competitive contracting market where the companies that offer the technologies and services that the government needs most are most likely to survive and prosper. To add these technologies to their portfolios, large contractors will eye the innovative, niche contractors as acquisition targets, which will lead to an up-tick in M&A activity in the market and a consolidation in the contracting industry.