The WashingtonBusinessJournal recently quoted SAIC CFO Mark Sopp stating “valuation has gone against us since we’ve gone public (SAIC is down approximately 26% post-offering)… [and] we have not raised capital through the equity markets and we don’t plan to do so…So it’s hard to point at net positives of going public, other than the infrastructure improvement and discipline and cadence we created…”

There have been 16 IPOs by government services companies since 2000, raising combined proceeds of approximately $4 billion.  Six of these initial offerings occurred in 2002 commensurate with the commencement of the war on terror and national security focus, and five occurred in 2006 alongside  heightened defense spending expectations.

Of the 16, only seven remain public (the others have been acquired), and of those seven only ICF and ManTech have posted positive stock returns since IPO.  The average stock price for the remaining five companies (Booz Allen, SAIC, NCI, KEYW, QinetiQ) has declined more than 20% since IPO with NCI down nearly 50%.  Companies have been deprived of one of the ideal benefits of a public offering – access to capital through additional offerings or currency for acquisitions to fuel growth.  ICF was the last contractor to issue a follow-on offering, and that was in 2009.  Additionally, none of the aforementioned firms besides KEYW have made an acquisition utilizing stock to finance a material portion of the purchase price.

The absence of these inherent go-public benefits begs the obvious question: is there any benefit for a government service provider to be a public company?  Moreover, will we see more companies such as SRA International choose to go private in the near to medium term in what is anticipated to be a challenging market environment.

 

The Aerospace Industries Association released a report this week estimating that more than 2 million American jobs could be lost next year if sequestration is allowed to proceed as planned.  Of the 2 million jobs, nearly 270,000 federal jobs are expected to be lost, but only 48,000 federal jobs are expected to be lost at defense agencies.  An additional 340,000 government contracting and private sector job losses could be tied to the impending budget cuts.  More information about the effects of sequestration will likely become available now that the House passed the Sequestration Transparency Act.  The bipartisan bill was approved by a wide margin and requires The White House to produce a report outlining how the $1.2 trillion in cuts will be distributed across the federal government.

Amid continued violence in Syria, U.S. Defense Secretary Leon Panetta stated at a press conference this week that the situation was, “rapidly spinning out of control.”  Panetta was joined by British defense chief Phillip Hammond.  Both agreed that the conflict in Syria must end with a peaceful transition and Assad stepping down from power.  Panetta noted that the United States and its allies were working to safeguard stockpiles of chemical weapons in Syria to prevent further conflict escalation.  In addition, both the United States and members of the U.N. Security Council are working together to craft a resolution that would impose sanctions on the Syrian regime.

Big Movers

Heroux-Devtek Inc. (Up 16.3%) – Shares traded upward this week after the Company announced it was selling its Aerostructure and Industrial Products Operations to Precision Castparts Corp.

Textron (Up 13.7%) – Shares traded upward this week after the Company reported second quarter profit of 58 cents a share, beating estimates of 44 cents a share.  Increased profits were driven by strong performance in Textron’s Bell helicopter and Cessna units.

Relevant Transactions

FutureNet Group, Inc acquired the assets of Smith & Wesson Security Solutions, a subsidiary of Smith & Wesson Holding Company.  Smith & Wesson is selling the assets of the subsidiary to concentrate more resources on its core firearms business.  Smith & Wesson will continue to operate the subsidiary as it explores strategic alternatives for a complete divestiture.  Wedbush Securities advised Smith & Wesson on the asset sale.  Terms of the deal were not disclosed.

Precision Castparts Corp. acquired Aerostructure and Industrial Products Operations from Heroux-Devtek Inc., an aerospace and industrial manufacturer in Canada.  Precision Castparts purchased the business units for CAD 300 million (~$296 million), approximately 2.3x revenue. The final purchase price is subject to post-closing adjustments.

L-3 Communications completed its spin off Engility Corporation, a provider of program management and systems acquisition support services for defense and civilian agencies.  One share of Engility will be distributed for every six shares of L-3 common stock.  Bank of America served as the financial advisor to L-3 Communications.

Environmental Systems Research Institute has acquired GeoIQ, a provider of software solutions for managing and analyzing data.  GeoIQ will be relocated from Arlington, VA to Washington, DC to join ESRI’s staff at a new software development center.

SAIC has agreed to acquire maxIT Healthcare, a provider of clinical IT implementation services to healthcare providers.  The total consideration is $493 million, with $473 million in cash up front and $20 million in an earn-out.  SAIC is expected to add approximately 1,300 maxIT employees to its Health Solutions Business Unit.

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Following mishaps during a U.S. air raid last November, resulting in the death of 24 Pakistan soldiers, Pakistan has reopened its borders to NATO supply convoys serving Afghanistan. The seven-month blockade of essential supply routes increased already heightened tensions between both countries and forced the U.S. and its allies to rely on longer and more expensive routes through Asia, Russia, and the Caucasus.

The lift comes as a relief to both countries, as well as their respective NATO allies. Pakistan’s new prime minster, Raja Pervez Arshaf, acknowledged that continuation of the blockade would damage relations with the U.S. and other NATO states. Similarly, the U.S. and its NATO allies have indicated the supply routes are essential for the planned withdrawal of combat forces from Afghanistan through 2014. The move has received positive reception from political leaders, who say it is a commitment to improving relations and securing a brighter future for both Afghanistan and the region at large.

The blockade was costing the U.S. military roughly $100 million a month.

Big Movers

GKN plc (Up 13.2%) – Shares traded upward this week after the Company announced it would acquire Volvo Aero, the aero-engine manufacturing division of Volvo AB, for £633 million ($987 million).

Safran SA (Down 6.4%) – Shares traded downward this week after the Company agreed to form a 50/50 joint venture with MTU Aero Engines under the name AES Aerospace Embedded Solutions GmbH.

Relevant Transactions

Teledyne Technologies Inc. acquired BlueView Technologies Inc., a provider of compact forward-looking imaging sonar, microbathymetry systems, and 3D scanning sonar. The acquisition will add new technology and products to Teledyne’s marine group and increase instrumentation content on autonomous underwater vehicles and remotely operated underwater vehicles used in marine survey applications. The terms of the deal were not disclosed.

GKN plc to acquire Volvo’s Aerospace Division, the aircraft-engine unit of Volvo that produces components for aircraft, rocket, and gas turbine engines, for £633 million ($987 million). The acquisition will allow GKN to broaden its product range with engine components and expand its presence in the fast-growing civil aircraft sector.

Precision Castparts Corp. to acquire Klune Industries, a manufacturer of complex aluminum, nickel, titanium, and steel aerostructures. The acquisition will allow Precision Castparts to continue expansion into the widely fragmented aerostructures market with increased sheet metal and fabrication capabilities. The terms of the deal were not disclosed.

ITT Exelis acquired Space Computer Corporation, a producer of real time signal processing systems, software, and algorithms for the exploitation of hyperspectral sensor data. The acquisition will allow Exelis to address the challenge of data processing that has been an area of concern for the military, intelligence community, and existing customers. The terms of the deal were not disclosed.

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Airbus announced that it could enter the U.S. market as early as Monday with plans to build its A320 jets in Mobile, Alabama. Similar to when Toyota entered the domestic auto industry during the 1980s, this move could transform the domestic aerospace industry.

In response, Boeing has issued statements against its rival Airbus claiming that any job creation in the U.S. will not offset the alleged damage caused by “illegal subsidies” at Airbus. Both industry giants are familiar with illegal subsidies accusations, with a recent European Union case against Boeing currently moving through appeals at the World Trade Organization (“WTO”) and a previous case from the WTO that ruled Airbus had received illegal subsidies.

Media reports indicate that the package of incentives for Airbus, including right-to-work laws, lower labor costs than Europe, and the recent package outlined for the protracted U.S. Air Force refueling tanker contract could amount to more than $100 million and the creation of more than 1,000 jobs. Airbus already spends $12 billion each year in the U.S. sourcing parts for its jets, but the aggressive move into Boeing’s home court could potentially split the political support Boeing’s company has experienced.

Big Movers

Macdonald Dettwiler & Associates Ltd. (Up 34.0%) – Shares traded upward this week after the Company announced it will acquire Space Systems / Loral, Inc, the commercial satellite subsidiary of Loral Space & Communications, Inc. for $875 million.

Unisys Corporation (Up 24.8%) – Shares traded upward this week after the Company won a contract from the Department of Homeland Security to compete for task orders under the $3 billion Tactical Communications Equipment and Services contract vehicle.

Smith & Wesson Holding Corporation (Up 17.4%) – Shares traded upward this week after the Company announced fourth quarter sales of $129.8 million, compared to estimates of $126.5 million. Additionally, the Company’s profit grew to $12.5 million, from $1.1 million in the same quarter last year.

Relevant Transactions

General Dynamics to acquire Earl Industries’ Ship Repair and Coatings Division, a ship repair company that supports the U.S. Navy fleet in Norfolk, VA and Mayport, FL. The acquisition allows General Dynamics to expand its National Steel and Shipbuilding Company (“NASSCO”) maintenance and repair operations to two key East Coast naval ports. The terms of the deal were not disclosed.

Cassidian / EADS to acquire Carl Zeiss’ Optronics, a defense optics unit of Carl Zeiss that develops, manufactures, and distributes a wide range of optical and optronic products and systems for the Army, Navy, and Air Force. The acquisition allows Cassidian, the defense unit of EADS, to expand its offerings with Optronics’ night vision binoculars, military laser pointers, and satellite optics. The terms of the deal were not disclosed.

Macdonald Dettwiler & Associates (“MDA”) to acquire Space Systems / Loral, a subsidiary of Loral Space & Communications Inc. responsible for the design, manufacturing, and integration of commercial and government satellite systems worldwide, for $875 million. The acquisition allows MDA to support the growing demand for high-powered satellites in the commercial market.

Deloitte to acquire IE Discovery, a provider of litigation support and electronic discovery management services to government agencies, corporate law departments, and outside counsels. The acquisition allows Deloitte to provide electronic data discovery services to the federal government and compete with other service providers’ existing federal e-discovery services. The terms of the deal were not disclosed.

BE Aerospace to acquire Interturbine, a leading provider of material management logistical services to global airlines and MRO providers. The acquisition will double BE Aerospace’s consumables product portfolio and will help to position the Company to offer a comprehensive range of products and services on a single-source basis to its customers. Interturbine will be acquired for a cash consideration of approximately €200 million ($249 million).

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The U.S. Defense Department could face up to $100 billion in budget cuts under any deficit reduction deal, according to the chairman of the U.S. Senate Armed Services Committee, Senator Carl Levin.  These cuts would be in addition to the $487 billion the Pentagon already plans to reduce its projected spending by over the next 10 years. According to Sen. Levin, areas such as, the nuclear weapon stockpile, could safely handle a decrease in funding, but reductions upwards of $10 billion, over a 10-year period, across the entire DoD, is risky.  Ultimately, defense will have to play some role in a larger deficit reduction package to avoid sequestration of the Pentagon’s budget.

As an effect of these cuts, trans-Atlantic relations are at serious risk should the U.S. plan to kill off development of the Medium Extended Air Defense System (“MEADS”).  The air-transportable MEADS was developed by the U.S., in conjunction with Germany and Italy, to replace the Patriot anti-missile system.  The U.S. previously agreed to fund the program through its “Proof of Concept” phase in 2014, after deciding not to purchase the theater-based missile defense systems. However, with current budget restructuring and reductions, the U.S. National Defense Authorization Act for 2012 requires the funds to be severed, an action that could negatively affect the U.S. relationship with Germany, Italy, and the NATO alliance in the future.

Big Movers

Bombardier Inc. (Up 5.5%) – Shares traded upward this week after an announcement that Series 2 Preferred shareholders, who receive a monthly floating adjustable cash dividend, have the right to convert all, or part, of their shares for a one-for-one basis into Series 3 Preferred Shares, to receive a quarterly fixed cash dividend for the following five years.

AAR Corp. (Down 13.3%) – Shares traded downward this week after an announcement that the Company’s Board of Directors authorized repurchase of up to $50 million of its outstanding shares of common stock.

Relevant Transactions

Mercury Computer Systems to acquire Micronetics, a manufacturer of microwave and radio frequency (“RF”) components and subsystems used in a variety of defense, aerospace, and commercial applications. Mercury pursued the acquisition to “enhance [its] integrated digital and RF subsystem solutions for existing and next generation defense and intelligence programs.”  Mercury’s offer is $14.80 per share, implying an enterprise value for Micronetics of around $75 million.  For its fiscal year ended March 31, 2012, Micronetics reported revenues of $46 million.

Teledyne RD Instruments to acquire BlueView Technologies, a provider of compact, high-resolution, acoustic imaging and measurement solutions.  The acquisition will add unique technology and products to the Teledyne Marine group, whose 11 businesses provide acoustic sensors and communication devices, harsh environment interconnects, and complete autonomous underwater vehicles. Terms of the deal were not disclosed.

Saab acquires Taby Displayteknik AB, a developer of simulator solutions such as, Joint Fires Synthetic Training. The acquisition will establish Saab as a training provider for virtual joint exercises, and is part of its growth strategy to offer a more complete virtual training business. It also complements Saab’s previous acquisition of E-COM, a provider of subsystems for virtual training in virtual joint exercises.  Taby Displayteknik was a subsidiary of ISD Technologies AB, which Saab previously owned 30 percent. Terms of the deal were not disclosed

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