2011 M&A Outlook
M&A activity continues to thrive, despite a new era of government contracting characterized by uncertainty. The broken procurement structure and anticipated pullback in federal spending continues to pressure the organic growth outlook for Government Services and Aerospace / Defense (“A/D”) contractors. However, healthy balance sheets, access to capital, and need to supplement slower organic growth are expected to continue to fuel M&A. A few key takeaways serve to support this thesis:
- As budgets tighten and the breadth of growth opportunities narrow, M&A will likely remain the tool of choice to affect change and reposition in response to organic growth pressures.
- Ample access to capital. As mentioned, the labor-based government services business model is inherently a low investment, high cash flow business which is conducive to debt financing
- The buy vs. build proposition for a customer, contract, or capabilities in a low cost of capital environment (i.e., cash interest or cost of debt) increases the ROI of potential transactions.
- Wealth of buyers and sellers in a mature, consolidating market. The market challenges faced by the larger public firms are only exacerbated as smaller and mid-size contractors lack the infrastructure and in some cases financial wherewithal to weather the new era challenges. To the positive, these smaller and mid-sized firms often have innovated solutions more leverageable on the platform of larger players who are flush with capital. This combination drives M&A interest amongst both parties.
Where there are challenges remains opportunity, and this reigns true within the backdrop of the new era in government contracting. With strong momentum entering 2011, the Government Services and A/D market is well capitalized, and motivated to continue to participate in M&A transactions aimed to supplement organic growth and drive shareholder value.
(1) Aggregate share repurchases, dividends, and cash acquisitions in billions for Government Services and A/D