Unlocking the M&A Value of Contract Vehicles
Contract vehicles remain key to opening the doors to access funding, capture new work, and thereby grow the top line. This contracting dynamic encourages larger buyers to open their M&A aperture to smaller targets possessing these valuable treasures. For smaller companies, the value proposition rests in whether the contract is more valuable to someone else, rather than the awardee itself. A few such deal motivators worth considering are the “Underutilized Contract Vehicle”, “The Recompete”, and “Pay to Play”scenarios.
Underutilized Contract Vehicle. The leveragability of a multi-billion, multi-year contract vehicle on a large integrators’ platform (reach, past performance, business development, proposal shop etc.) may motivate strategic premiums at a value that outweighs the financial opportunity of the smaller contract awardee mining that vehicle on its own over the period of performance. Examples may include ManTech’s acquisition of TranTech Inc. in early February, a prime holder of ENCORE II.
The Recompete. In May 2010, DIA awarded its $6.6 billion Solutions for the Information Technology Enterprise (SITE) contract to six large and five small business primes. Left sitting on the sidelines amongst others was CSC. The scope of SITE included the legacy DIESCON 3 (CSC was one of seven primes) and ICE 2 (General Dynamics) work, and was marketed as the go-to vehicle for DIA and other Intelligence Community IT needs going forward. In December, CSC acquired SITE prime CenTauri Solutions.
Pay to Play. Incumbency value, characterized by longevity of past performance, geographic proximity, and intimate knowledge of a customer mission, personality, and requirements, represents a formidable barrier to entry in the defense industrial base. Acquisition of a Company holding a go-to vehicle for a given market with and especially having had significant success under that vehicle increases the odds of overcoming these barriers for a newcomer or a new strategy (e.g., all the new private equity teams making investments in the space). At minimum, vehicles afford holders an opportunity to compete. Example deals could include Salient Federal Solutions, Inc. acquisition of Command Information (also ENCORE II motivated) and CACI International Inc. acquisition of Applied Systems Research, Inc. ($500M+ IC IDIQ).
In a market mired with a yearning for differentiation, contracts vehicles represent a clear one, offering both access to customer spend and a barrier to competition for that spend. Moreover, the challenged procurement process of awarding new contracts further enhances the value of those contracts already in hand. But remember, the value of the contract from an M&A perspective is typically only as good as the continuity of use following a change of control, so understanding a buyer’s ability to continue to bid new task orders, and to perform on existing task orders and options exercised is critical when assessing value.