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FCW : April 15, 2013
36 April 15, 2013 FCW.COM Reconfiguring to meet agency needs With defense spending under severe pres- sure, smart contractors that rely heavily on defense customers are investing in areas that will likely be growing. Indeed, many of the deals that closed last year reflect customer demands or at least anticipated demands, which include cloud, cybersecu- rity, health and data analytics. For instance, CACI International bought multiple health IT companies because it believes that, regardless of budget cuts, spending on health care will continue. The company was recognized as the best large- business dealmaker. CACI took the same approach to build- ing its intelligence business a decade ago. And intelligence spending is expected to be another safe haven, which explains why pri- vate equity groups such as Arlington Capi- tal Partners continue to fund deals in the federal market. In 2012, the firm created Novetta Solu- tions by combining two companies and buying two more. It was picked as the best private equity deal of the year. Again, the acquisition was driven by customer demand. In this case, Arlington Capital saw an opportunity to create a leading company that provides intelligence and cybersecurity services to government agencies through data analytics and iden- tity intelligence. KEYW Corp. was recognized as best over- all dealmaker for its four acquisitions and for the best intelligence deal for one of those acquisitions, Poole and Associates. That acquisition also illustrates another trend among buyers: making deals to get access to specific contracts. Poole had just won a five-year, $150 million contract with an unnamed intelligence customer that KEYW considers one of its most important clients. But besides following customer demands, two other trends drove the high number of completed deals. Both are relat- ed to divestitures. In the first trend, companies reshaped their portfolios by divesting themselves of particular businesses --- a move that is often driven by concerns about organiza- tional conflicts of interest. SAIC's sale of its test and evaluation business to American Systems Corp., which was picked as the best deal by a midsize company, is a prime example. Such concerns can keep a company from bidding on certain contracts if other parts of that company have worked on the development of those contracts. Agencies are increasingly making companies choose one part of a project to bid on and do not allow them to bid on both components, no matter how the companies mitigate conflict-of-interest concerns. Therefore, companies have started selling o businesses in hopes of letting both sides gain access to more opportunities. In the second divestiture trend, compa- nies are responding to tight budgets and pressures on profits by selling o businesses that are not central to their core strategies so they can focus their resources more e ectively. This is what led MorganFranklin to sell o part of its business to SRA International. The deal was one of three picked as the best divestitures of the year. The role of federal budget uncertainty Last year saw 103 M&A deals --- 21 more transactions than in 2011. That again goes counter to our expectations given the bud- get uncertainty and tepid economy. But in this case, the budget uncertainty aided the dealmaking because as 2012 was coming to a close, the country was facing the so-called fiscal cliff, which included changes in capital gains and other taxes. Twenty-one deals were completed in December --- far more than any other month of the year. The next busiest month was November, with 11 deals. Our M&A experts, who represent some of the leading invest- ment banks and law firms, attributed the year-end rush to sellers, particularly entre- preneurs, who wanted to cash out their businesses before tax rates went up. We expect the M&A activities to contin- ue in 2013, though perhaps at a slower pace. And through it all, contractors will continue to listen to customers, track spending hab- its and invest accordingly.• Our roundup of 2012's mergers and acquisitions covers the transactions that closed in 2012. Deals that were announced in 2012 but did not close are not included. The roundup is put together by the investment bank Houlihan Lokey and supplemented by Wash- ington Technology's sta and other reports. Our biggest deals of the year were determined by a panel of M&A experts from the following firms: Aronson Capital Partners, BB&T Capital Markets | Windsor Group, Bluestone Capital Partners, Free- dom Bank, Grant Thornton LLP, Holland and Knight, Houlihan Lokey, KippsDeSanto, the McLean Group, Pillsbury Winthrop Shaw Pittman, Raymond James, and Stifel Nicolaus Weisel. The top deals are chosen based on the impact they have on the companies making the deals and their impact on the market as a whole. 103 DEALS REMAKING THE CONTRACTOR MARKET
March 30, 2013
April 30, 2013