What Will this ‘Hunting Season’ Bring to M&A Volume?
For many government contractors, the final quarter of the government fiscal year (“GFY”), from July to September, presents an opportunity to secure additional funding as agencies attempt to spend the remainder of their budget for the year. This concentration in spending can be partially explained by a few factors. One of the most critical factors is the “use it or lose it” spending strategy employed by many Federal agencies who scramble to award unspent funds prior to fiscal year-end, as a large unspent balance at year-end is potential evidence of unnecessary government appropriations, and consequently smaller future budgets.
Historical data has shown approximately one-third of contract obligations occur in the fourth quarter of the GFY. Moreover, expenditure patterns have consistently shown that over the past five years, obligations in September (the final month of the GFY) have constituted ~20% of all outlays, nearly twice that of the next closest month. The expectation of recurring Federal expenditure increases in the last quarter of the GFY allows firms across the contracting landscape to win new business and bolster their backlogs. Supplemented by M&A statistics, Federal spending data provides an interesting relationship between increased agency expenditures in Q4 of the GFY, and increased M&A activity in Q4 of the calendar year.
There have been 39 deals announced through the first half of 2015 including major acquisitions by Raytheon and SAIC. If the trends of the past two years are any indicator of future M&A activity, one could extrapolate that those 39 deals represent ~46% of the annual total. That leaves ~54% of annual acquisitions remaining in Q3 and Q4 across the government market for 2015, with major anticipated acquisitions including Novetta Solutions, Lockheed Martin, and L-3 setting the stage for the remainder of the year. Bolstered by an anticipated uptick in Federal spending during Q4 of the GFY, 2015 is poised to continue the recent trend of increasing deal counts over the past few years. The expectation of more than 80 deals this calendar year will surpass previous years’ totals and further perpetuate the development of an increasingly active M&A market.
Sources: Bloomberg Government: Inside the Fight for End-of-Year Dollars: BGOV Presentation; KippsDeSanto Research