Market Watch | The fine art of government-services acquisitions

Over the past 15 years, the number and variety of government-services merger and acquisition transactions have dramatically increased. There is a significant number of serial acquirers that continually expand their due diligence lists and activities from the lessons they've learned. Moreover, the requirements of the Sarbanes-Oxley Act and financial institution covenants call for a deeper due diligence process. Higher valuation multiples also are causing buyers to want a more thorough understanding of the target company and any risk factors.

Consequently, acquirers have become more sophisticated in analyzing acquisition opportunities, often using the help of professionals such as lawyers, accountants, investment bankers and consultants with specialized knowledge of the government contracting industry. A cottage industry of professionals and advisers has come into being.

Due diligence now covers all legal, financial, accounting and tax matters with particular focus on government contracts, contract backlog, cash flow, and the taxable status of the company.

A lot of attention is focused on the ability to transfer small business and set-aside contracts, compliance with the Federal Acquisition Regulation, sellers' accounting systems and practices, the next 12 months of revenue, and customer relationships including past performance and sustainability.

More attention than ever is focused on softer issues: intellectual capital, quality of management, culture and overall reputation. Buyers of government services companies typically require retention agreements for key managers of a company.

This is done to give them a higher level of certainty that those managers will continue with the buyer, and that their subordinates will follow. A considerable focus is put on the capabilities and customer relationships of the senior managers.
Experienced buyers also want a thorough understanding of the target company's culture and how it compares to their own cultures. Each company has its own personality, usually reflecting the principal owner.

Comparing employee benefits is critical, as a buyer cannot offer less benefits if it wants most of the employees to stay with the new company. A lack of sensitivity to culture is probably the primary reason that some government services acquisitions do not succeed and integration plans don't work.

Consider that it is not unusual for a buyer's diligence team to consist of more than 20 highly specialized experts that will examine every aspect of a seller's business. More than ever, buyers are highly sensitive to potential risk or liability that could impact their expected rate of return. To avoid surprises, sellers should plan and prepare extensively before coming into the market. Professional advisers should be engaged to thoroughly review legal, government contract, accounting, tax and personnel issues.

Both buyers and sellers will spend considerable time, expense and opportunity during the due diligence phase. As a result, it is in the interest of both parties to create a higher level of certainty that a transaction will close before the two companies enter into an exclusive arrangement.

Establishing a high degree of certainty is accomplished through a combination of disclosure and preparation. It has never been more important that sellers disclose potential liabilities early in the process and be well-prepared for an extensive examination.

With the recent advent of online data rooms, sellers can and should allow potential buyers to perform as much due diligence as they want before putting the company under a definitive letter of intent. This minimizes the chance of the deal being renegotiated or not closing.

The seller should conduct reciprocal due diligence on the buyer, focusing on how the cultures fit and understanding the plan for integration.

Richard Knop is senior managing director and co-head of the defense and government services group at BB&T Capital Markets/Windsor Group, Reston, Va.

Reader Comments

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above

What is your e-mail address?

My e-mail address is:

Do you have a password?

Forgot your password? Click here
close
SEARCH
contracts DB

Trending

  • Dive into our Contract Award database

    In an exclusive for WT Insider members, we are collecting all of the contract awards we cover into a database that you can sort by contractor, agency, value and other parameters. You can also download it into a spreadsheet. Read More

  • Is SBA MIA on contractor fraud? Nick Wakeman

    Editor Nick Wakeman explores the puzzle of why SBA has been so silent on the latest contractor fraud scandal when it has been so quick to act in other cases. Read More

Webcasts

  • How Do You Support the Project Lifecycle?

    How do best-in-class project-based companies create and actively mature successful organizations? They find the right mix of people, processes and tools that enable them to effectively manage the project lifecycle. REGISTER for this webinar to hear how properly managing the cycle of capture, bid, accounting, execution, IPM and analysis will allow you to better manage your programs to stay on scope, schedule and budget. Learn More!

  • Sequestration, LPTA and the Top 100

    Join Washington Technology’s Editor-in-Chief Nick Wakeman as he analyzes the annual Top 100 list and reveals critical insights into how market trends have impacted its composition. You'll learn what movements of individual companies means and how the market overall is being impacted by the current budget environment, how the Top 100 rankings reflect the major trends in the market today and how the biggest companies in the market are adapting to today’s competitive environment. Learn More!