State of the Market
As we noted in our Summer 2013 MarketView, 2013 has been a relatively slow year in terms of M&A activity. Looking back at 2012 deal activity, there were several market dynamics that drove a heightened number of transactions, including tax changes, looming uncertainty leading up to the deadline for Sequestration, and the continuing resolution which provided near-term funding through March of 2013. Since the end of 2012, Sequestration has taken effect and there still is no real long-term budget solution. As a result, the sector has experienced a level of uncertainty that has been unprecedented for most industry participants.
Despite the quiet M&A activity this year, we believe the acquisition appetite for buyers remains strong, but highly-focused. In fact, most strategic buyers are well capitalized with ample cash balances and are highly motivated to supplement flat or negative organic growth with M&A. Financial sponsors are also eager to see new opportunities and put money to work in the space, especially for add-on or tuck-in acquisitions for existing platforms. The announced acquisition of Michael Baker Corporation by DC Capital’s portfolio company, Integrated Mission Solutions, and the establishment of Quantum Spatial through the acquisitions of Photo Science and Watershed Sciences by AeroMetric, an Arlington Capital Partners portfolio company, represent two recent notable sponsor-backed transactions.
Certainly, buyers’ focus will remain on companies that are well-positioned within key “hot lanes” such as health IT, cloud computing, and cyber / intelligence. However, acquisition targets that can demonstrate growth and profitability through prime, full and open contracts, and sustainable competitive differentiators in an era of LPTA and reduced spending quickly become rare and sought after assets even if they operate outside of the aforementioned “hot lanes”. It’s all about stability and sustainability.