News & Events

“Climbing Up the Pyramid” – Merger of Equals Ripple Effect

By Jon Yim

As the competitive landscape in Government Technology Solutions expands, growth remains a challenge for many of the companies.  As a result, companies continue to seek M&A opportunities for growth and strategic positioning within its ecosystem.  However, over the last twelve months, two notable mergers in the government contracting space have triggered a ripple effect on Government Technology Solutions’ hierarchy: (i) TASC and Englity (creating an ~$2 billion revenue company) and (ii) Harris and Exelis (creating an ~$8 billion revenue company).  Both mergers sought to expand and deepen customer footprints, increase capabilities-set, diversify contract vehicle portfolios, and generate meaningful cost synergies – realizing scale and creating stronger platforms for growth.

What effects did these mergers have on the industry?  These mergers have propelled the new entities up the pyramid, leaving industry gaps behind to be filled.  These gaps afford significant opportunities for more agile mid-size firms to position themselves for growth through M&A.  To take advantage of these openings, two mergers of mid -tier firms have taken place to strategically position themselves in a dynamic, competitive environment: (i) CRGT (Bridge Growth) and Salient (Frontenac) – creating an ~$375 million revenue business and (ii) MicroPact and Iron Data (Arlington Capital) – positioning the new entity to become the leading supplier of case management and BPM technologies in the public sector.  These combined entities not only have the ability to be more competitive in procurement processes with its larger size, but have the ability to address capability opportunities left behind by top-tier mergers.

What impact will these mergers have on M&A activities?  From a buyer landscape perspective, what this industry consolidation effect does is create a robust universe of potential buyers with healthy M&A appetites.  The newly formed entities from these mergers will continue to look for next acquisition opportunities to maintain their positions.  Additionally, other mid-tier firms will continue to be aggressive in looking towards growth acceleration opportunities through acquisitions to move up the pyramid.  Moreover, the ecosystem shaping is still taking place with the recent announcement of Computer Science Government Services (“CSGov”) and SRA International – creating an ~$5.5 billion revenue business, and many of the industry primes (e.g. BAE Systems, CSC, Lockheed Martin, and L-3 Communications) looking to divest their services business.  We do not know where all of these activities will lead, but the journey “Climbing Up the Pyramid” will continue.