In today’s austere environment of economic, budget and political uncertainties, many companies are shifting their priorities in order to remain competitive. This is especially true for government contractors seeking new growth through strategic acquisitions.
As we’ve seen in years past, cuts in government spending resulted in an increase of M&A activity as larger organizations acquired smaller firms in high growth areas. And this time around is no different, as companies are once again in a position to seek new areas of growth to offset the grave budget crisis destined to impact the government contracting community.
But what are some of these newer high growth areas? And what should contractors pay particular attention to?
Areas of growth simply boil down to where government is inclined to invest resources. For example, areas that are currently considered high priority include cybersecurity, cloud computing and healthcare IT, just to name a few.
Other areas to consider can include “companies that provide unique services that are mission critical in areas such as Biometrics, Intel and Homeland Security,” said Don Acker, managing director of a cost accounting firm for government contractors, Turn 10, LLC.
In fact, “anything with relatively secure funding sources and decent margins will become ‘hot,’ even if it’s not as sexy as cybersecurity sounds. Examples that come to mind include Operation and Maintenance (O&M) contracts of mission critical systems and the like.”
With regard to what contractors should pay particular attention to in this environment can vary on a case by case basis. For each company is unique in terms of customer base, service offerings and contracts.
For example, the recent and dramatic news of Science Applications International Corp. (SAIC) strategy of acquiring maxIT, a leading healthcare consulting firm, along with an announcement to separate into two independent companies, is a strategy that may not work for other firms due to the nature of operations.
However, regardless of a contractor’s size, one area worth paying special attention to is on a seller’s portfolio.
“More time should be spent analyzing the various contracts of a seller to see how well insulated they are from sequestration,” said Acker. “Be aware that contract types are very important in this environment. I would focus slightly more on backlogs than pipelines, while making sure that any backlog that I’m buying is as well insulated as possible. Make sure the burn rates are accurate, programs have started on time and the seller has done all they can to sufficiently staff the programs in place.”
Savvy contractors will have late quarter strategies in place to burn as much backlog as possible before January 2013 as funds burned can’t be sequestered. That being said, the buyer should pay attention to this and make sure that estimates to complete are accurate, and enough funding is left to properly deliver on the contract. “The last thing anyone wants right now is a negative mark on their past performance,” Added Acker.
Ultimately, as market uncertainties and budgetary pressures continue, M&A activity in the public sector should rise. Contractors looking to acquire companies as a way of positioning themselves for success during government spending cuts should look at high priority areas still primed for government investment while paying special attention to certain areas based on a seller’s portfolio.