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Between the Lines – HPTi sale to DRC

We have the opportunity to work as an advisor in the context of M&A transactions with many great companies.  Each company is unique, which is part of the allure and challenge of our work at KippsDeSanto.  However, there are very consistent themes that typically yield premium results.  Recently our client HPTi announced that they were being acquired by DRC at an attractive valuation, and this transaction has a couple important lessons for any company that is looking to build a valuable business.

Current M&A market conditions are dictating that value is driven by sustainable growth of both revenue and earnings.  This comes in two parts – (i) the ability to drive growth organically through the resources of the target company and (ii) the ability of the target company to offer additional opportunities for growth above and beyond what the target’s resources dictate.

The first piece is extremely important given the headwinds that are evident throughout the Federal sector (e.g., tight budgets, political pressures and swings, broader economic uncertainty, etc.).  Larger companies in the sector are looking to differentiate from their peers and there is no better way than to project (and achieve) higher growth rates. 

Sustainable growth is evidenced by a track record of success – critical mass / size, prime and F&O contract positions, and priority market and customer access / exposure.  It is also driven by culture (communication, incentives, career paths), infrastructure (contract vehicles, quality assurance, recruiting) and reputation (customer accolades, high-end capabilities, intellectual property).

The second piece is what we call “leveragability” and is often captured with the cliché of “1+1=3.”  Every M&A transaction is predicated on this concept.

The same tools and characteristics that drive organic growth are the foundation for leveragability.  The ultimate buyer of a target company often is the one that views the fundamentals of organic growth for a specific target company as most additive to its existing business.

The ideal scenario for any target company (or seller) is to have options.  Multiple options foster a competitive transaction process which in turn creates competitive pricing and deal terms.  Sustainable growth is a key driver of a successful outcome.  As is generally the case with our clients, they have poured their hearts and souls into building their businesses and they want an outcome that is rewarding. 

When the reward is not just personal, but involves all shareholders, management, employees and customers, in addition to legacy, it is important to be positioned for continued growth in order to be able to choose your destiny.

More on this topic: Q&A session with Kevin DeSanto