2012 marked another strong year of M&A activity in the government services space, with more than 100 announced transactions, and increase from 90 in 2011 and five year average of 93. Despite strong market headwinds driven by budget pressures, procurement challenges, and the obsession with LPTA, deal activity remained high. Taken at face value, the number of announcements evidenced the continuation of M&A as a preferred use of capital, and more so as a tool to enhance competitiveness and growth prospects by augmenting contracts, capabilities, or customer footprint.
2012 volume was also encouraged by the anticipated 2013 tax hikes; however, we’d attribute only a slight increase relative to prior years from this. Notably, there continues to be heavy activity in the “hot” funding areas as 33% of all announcements in 2012 involved targets in the Intel/SOF, Cyber, or Health IT space. From a capabilities perspective, application development, cloud, virtualization, big data, and cost cutting solutions were also in high demand.
What the number of deal announcements doesn’t signal is the strength of the deal activity and valuations. Generally, valuations were disparate across the deal universe, with actual multiples very deal-by-deal specific. High single and double digit multiples opportunities remained for the top decile, pure play businesses focused on the aforementioned hot lanes. That said, there were also valuations in the mid-single digits that would be considered very successful outcomes. The deal number comparison also fails to address close rates, for which there is less definite data. Anecdotally, KippsDeSanto estimates the number of unsuccessful sellers was also higher than previous years.
Simply, the buyers are more discriminating than ever. The hold and harvest model may be more financially attractive for select owners. However, the deal market overall remains active and dynamic, but more than ever it’s important to seek sound advice and take the market temperature from those with deal experience when contemplating a transaction given the current environment.