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Jun 14, 2013
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Recent U.S. Weapons Systems Hack Foreshadows Continued Investment in Cybersecurity

A nonpublic report received by The Washington Post late last month has identified over two dozen major U.S. defense and weapons systems that were compromised by an extended cyber exploitation mission. The report was compiled in January 2013 by the Defense Science Board (“DSB”) Task Force on Resilient Military Systems, a senior advisory group to the Department of Defense (“DoD”). A public version of the report is available, though it does not include the specific systems and technologies targeted in the breach. The public version also does not directly accuse China of perpetrating the breach, though The Washington Post has reported that “senior military and industry officials with knowledge of the breaches said the vast majority were part of a widening Chinese campaign of espionage against U.S. defense contractors and government agencies.”

Click here to continue reading this article, located in Aronson Capital Partners’ May Market update.

 

May 16, 2013
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Financial Sponsors – Continued Interest in Government Services

Over the last five years, the Government Services industry has seen continuous interest from financial sponsors. Private equity firms have acquired publicly-traded services providers (e.g., Providence/SRA; Ares/GTEC), divestitures of large systems integrators (e.g., Veritas/The SI; General Atlantic & KKR/TASC), and both middle and small market contractors (e.g., Arlington/White Oak Technologies; LLR/Paragon). In 2012, private equity firms and their platforms accounted for one-third of the acquisition activity within Government Services. Financial sponsors are expected to continue to play a significant role in the Government Services M&A market as contractors (public and private) seek new opportunities to grow in an environment of sequesters, budget cuts, and funding uncertainty.

The Draw of Government Contracting

Financial sponsors like predictable cash flows and large addressable markets. Compared to the commercial sector, federal contractors have relatively high revenue visibility and backlog and enjoy greater confidence in their ability to collect pending customer payments. In addition, the sector is highly fragmented with opportunities for industry consolidation to either enhance an established contractor’s capabilities/customer base via bolt-on acquisitions (e.g., Camber/Novonics), or to roll-up several small companies and form a more competitive contractor with greater scale and ability to meet customer needs (e.g., Arlington/Novetta).

The Need for Financial Sponsors

As the market environment continues to evolve, opportunities become available for those with capital. After being acquired by Ares Management in 2011, Sotera Defense Solutions (formerly GTEC) President and CEO John Hillen said, “Being a part of that investor group gives us access to a lot of capital to do more and bigger deals than we could as a public company.” Within a year of the change in ownership, Sotera outbid its competitors to acquire Software Process Technologies and Potomac Fusion. With flattening growth and shrinking market sub segments, several contractors are leaning towards a more active M&A strategy as a key avenue to grow revenue streams in priority markets.

Deal Mechanics of Financial Sponsors

Borrowing capacity and cash balances have increased for many public contractors since last year, but M&A deals in 2013 have been sparse. Sequestration, budgetary concerns, the debt ceiling, and other topics on the Hill have increased uncertainty in today’s market. As a consequence, the gap between buyer and seller valuation expectations has widened. In this environment, financial sponsors have an important role to play through structuring instruments like earnouts, equity rollovers, and seller notes. These instruments are typically less likely to be included in a strategic buyer’s consideration, or at least to a lesser degree. Forms of consideration that provide paths for additional value through structure may be the only way to bridge the gap between buyer and seller expectations in the current environment.

This article is contained in ACP’s April Market Update.

May 1, 2013
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Forbes: “As Budget Cuts Bite, Defense Contractors’ Fortunes Diverge”

While federally-focused service providers have been hit hard in recent times, weapons systems integrators have not been immediately impacted. Large weapons systems programs are more difficult to cut than IT and training contracts. This has allowed weapons manufacturers to focus on longer-term margin expansion strategies as service providers downsize and restructure.

Click here to read the entire article from Forbes.

Jan 30, 2013
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The NSA Will Continue to be a Priority Acquisition Market

In recent years, the National Security Agency (“NSA”) market has been an acquisition hot spot, as large contractors attempt to re- position their contract portfolio into the faster growing segments of federal spending. The pace of acquisitions accelerated in early 2010 following the creation of the U.S. Cyber Command (USCYBERCOM), especially once it was confirmed that the sub-unified command would be co-located with both the NSA and recently relocated Defense Information Systems Agency (“DISA”) at Ft. Meade. Well-positioned NSA contractors not only offer an acquirer access to the largest U.S intelligence agency, but an entrée into USCYBERCOM, which is commanded by General Keith Alexander, the Director of the NSA.

On January 27, 2013, the Washington Post published an article stating that in late 2012, the Pentagon approved a major expansion of USCYBERCOM, from 900 personnel to approximately 4,900. In the midst of sequestration risk, a continuing resolution, and debt ceiling headlines, such a significant increase in personnel only highlights the significance of the cyber threat to our nation.

According to the Washington Post, the increased personnel at USCYBERCOM will fall into one of three categories:

  • National Mission Forces – to protect computer systems that undergird electrical grids, power plants, and other critical infrastructure
  • Combat Mission Forces – to help commanders abroad plan and execute attacks (offensive operations)
  • Cyber Protection Forces – to fortify the Defense Departments networks

Because USCYBERCOM is so intertwined with the NSA, we expect this increase to further validate a buyer’s investment thesis on the Fort Meade market. When government personnel increase, contractor dollars typically follow. In the past four years, there have been 26 acquisitions of companies whose primary customer was the NSA. This number peaked in 2011 when there were nine transactions closed, as shown in the below graphic. In 2013 & 2014, we expect that targets focused on the NSA market will
continue to stay at the forefront of strategic buyers’ acquisition criteria.

See the full Washington Post article here; to receive the acquisition detail for the above graphic and corresponding valuation metrics, please contact Aronson Capital Partners 

 

 

 

 

 

Dec 12, 2012
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November Defense Federal Technology Market Update

We invite you to read our November 2012 Newsletter, featuring the following topics:

*Defense Contractors Build Up Cash Balances

*Selected M&A Transactions

*Industry Updates

*Government Services Index Performance and Valuations

*Public Company Comparables

*Recent Industry M&A Transactions

Click here for a complete pdf file of the newsletter: ACP Monthly M&A Update – November Edition

Nov 13, 2012
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October Defense Federal Technology Market Update

We invite you to read our October 2012 Newsletter, featuring the following topics:

*Healthcare IT Spotlight: Next Generation Initiatives at VA

*Selected M&A Transactions

*Industry Updates

*Federal Sector Index Performance and Valuations

*Public Company Comparables

*Recent Industry M&A Transactions

Click here for a complete pdf file of the newsletter: ACP Monthly M&A Update – October Edition

Oct 11, 2012
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September Defense Federal Technology Market Update

We invite you to read our September 2012 Newsletter, featuring the following topics:

*Healthcare IT Spending Analysis

*Selected M&A Transactions

*Industry Updates

*SAIC Spinoff Update

*Federal Sector Index Performance and Valuations

*Public Company Comparables

*Recent Industry M&A Transactions

Click here for a complete pdf file of the newsletter: ACP Monthly M&A Update – September Edition

Aug 10, 2012
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July Defense Federal Technology Market Update

We invite you to read our July 2012 Newsletter, featuring the following topics:

*Federal Sector Market Outlook

*Federal Sector Index Performance and Valuations

*Industry Updates

*Selected M&A Transactions

*Public Company Comparables

*Recent Industry M&A Transactions

Click the following link for a complete pdf file of the newsletter: ACP Monthly M&A Update – July Edition

Jul 10, 2012
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CIA Shifts Strategy in Iraq—Still High Demand for Niche Capabilities

The post-war reductions of CIA personnel in Iraq could provide greater opportunities for contractors with niche capabilities in intelligence collection, processing, and analysis. The Wall Street Journal reported that the CIA is considering plans to reduce its presence in Iraq to 40% of wartime levels due, in part, to Iraqi officials’ unfavorable feelings toward a major CIA presence in the country.1 U.S. officials have since complained that deteriorating communications with Iraq have resulted in significant losses of situational awareness regarding the activities of al-Qaeda in Iraq. As a result, the CIA and other members of the Intelligence Community (“IC”) will have to shift operations back toward traditional intelligence collection and will need the help of private contractors to augment such a shift.

In light of fiscal pressures and sequestration concerns, the IC contracting community is expected to experience cuts in contracting and spending. However, there are still valuable growth opportunities which complement the Obama administration’s national security strategy to conduct smaller operations by combining intelligence and special operations capabilities. Leon Panetta, Defense Secretary and former Director of the CIA, stated in the January 5, 2012 strategic review briefing that even with a reduction in the overall defense budget, “We will protect our investments in special operations forces, new technologies like ISR and unmanned systems, space and cyberspace capabilities, and our capacity to quickly mobilize.”2

Many niche IC contractors can expect to see minimal to no decreases in product/service demand as the IC continues to expand its presence in various areas of interest around the world, successfully execute missions, and receive greater authorization for OCONUS initiatives and operations—such as the recent expansion of the Yemen drone campaign.3

Areas of expected growth and continued opportunity include unmanned aerial vehicles (UAVs), unmanned ground vehicles (UGVs), and various forward operations support services such as network connectivity, sensors, radars, mobility, cyber security, data analytics, training, and engineering services. Aronson Capital Partners continually talks with potential acquirers who have shown increased interest for small to mid-sized contractors with capabilities in the aforementioned areas. We would be more than happy to discuss strategic alternatives with you.

1 Gorman, Siobhan, and Adam Entous. “CIA Prepares Iraq Pullback” Wall Street Journal. 5 June 2012.
2 Corrin, Amber. “Obama, officials lay out new US defense strategy” Defense Systems. 5 January 2012.
3 Entous, Adam, Siobhan Gorman, and Julian E. Barnes. “U.S. Relaxes Drone Rules” Wall Street Journal. 26 April 2012.

Jul 10, 2012
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June Defense Federal Technology Market Update

We invite you to read our June 2012 Newsletter, featuring the following topics:

*Selected M&A Transactions

*Industry Updates

*CIA Strategy Shift in Iraq

*Government Services Industry Performance

*Public Company Comparables

*Recent Industry M&A Transactions

Click the following link for a complete pdf file of the newsletter: ACP Monthly M&A Update – June Edition

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Aronson Capital Partners is a leading financial advisor to government services and technology firms. We exercise our special domain expertise in the Defense, Intelligence, and Federal Civilian markets to achieve exceptional results for our clients. In addition to completing more than 100 transactions in the federal sector, our principals have decades of executive level, hands-on experience in the industry – a key differentiator that leads to success.