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Expectations for 2012 Government Services M&A Activity

While 2011 announced M&A deals was slightly down, the market for companies looking to sell and buyers’ interest in highly strategic acquisitions, was active as ever.  At first glance, these seem to conflict; however, the key to the aforementioned is highly strategic.  Gone are the days of acquiring simply for scale as the norm, but what is telling is how true the government services buyers are staying to their “wish list.”  Coveted attributes come in different forms (e.g., contract vehicles, presence in high growth markets, scalable technologies / intellectual property, robust infrastructure, exceptional leadership team), but the key takeaways are growth potential, leveragability, and risk mitigation.  2012 is poised to be highly active; however, we anticipate actual transaction volume similar to 2011 levels as there remains a dearth of targets to meet buyers’ very particular acquisition criteria and reach a meeting of the minds around valuation.  A few takeaways for 2012:

1. Corporate growth expectations given the macro Federal funded outlook remain bearish.

Evidence of Trend: Public government services multiples near all-time lows.

What to Expect: Continue acquisitions focused on the fast growth market segments – cybersecurity, intelligence, healthcare, cloud computing, and big data.

2. Potential for 2013 tax increases may drive deal volume

Evidence of Trend: Elevated 2010 deal volume; at least in part due to some sellers’ anticipating 2011 tax hikes.

What to Expect: Lots of deal activity in the second half of the year as sellers try to pre-empt potential 2013 increases.

3. The 2012 Presidential Election may drive uncertainty and motivate buyers to place (or withhold) their acquisition bets.

Evidence of Trend: Strong transaction volume in 2008 and major concerns with mounting deficit pressure.

What to Expect: Stakeholders’ looking to exit before the “storm” and buyers’ hesitancy to acquire companies in markets that have even a perceived risk of major cuts.

4. Changing landscape of Overseas Contingency Operations and a leaner, more mobile military force.

Evidence of Trend: Drawdown of Department of Defense and ramp-up of Department of State (“DoS”) in Iraq occurred faster than most anticipated.

What to Expect: Significant M&A activity for contractors in markets such as: (i) DoS (including the limited pool of awardees on DoS contract vehicles); (ii) special operations; and (iii) intelligence (e.g., all-source, counterintelligence, HUMINT).

Contributors: Marc Marlin and Robert Dowling