M&A special report | Rulers of the M&A game

Dealmakers see a government market ripe for acquisitions

The top two deals on this year's roundup of
mergers and acquisitions offer the best snapshots
of the types of buyers active in today's
market.

Leonard Green and Partners LLP's acquisition
of Scitor Corp. represents the deep-pocketed
financial buyer looking for an investment
platform in the government services market,
and Northrop Grumman Corp.'s acquisition of
Essex Corp. embodies the established strategic
buyer looking to build market share and gain
access to growing niches in the government.

The Scitor and Essex transactions are just
two of the 99 acquisitions that closed in the
government services market during 2007.
That compares to 84 in 2006 and 100 in
2005. Investment bank Houlihan Lokey
Howard and Zukin Inc. compiled the roundup
for Washington Technology as it has each year
since 2004, when 106 transactions closed. A
panel of M&A experts then picked the top 10
deals.

Financial buyers in this year's roundup
include familiar private-equity groups, such as
the Carlyle Group and Veritas Capital, and new
players, such as D.C. Capital Partners. They see
the government market as an attractive investment
because of its stability and steady cash
flow.

For strategic buyers ? including, in addition
to Northrop Grumman, a virtual who's who of
the government contracting world ? acquisitions
have emerged as a critical means for
keeping up with changes in the marketplace.
Acquisitions represent a way to reach new customers
and contracts in addition to following
changes in government priorities.

For example, NCI Inc., of Reston, Va.,
acquired Karta Technologies Inc., of San
Antonio, to position itself for changes in the
coming years from base realignment and closure
(BRAC) activities.

"We felt there were places like Huntsville,
Ala.; San Antonio; and Colorado Springs,
Colo., where the military presence will grow as
a result of base closings elsewhere," said Terry
Glasgow, president and chief operating officer
at NCI.

A command position

Northrop Grumman wasn't afraid to pay top
dollar for Essex because it knew the company
had a strong position in the lucrative
and hard-to-crack C4ISR market, which
stands for command, control, communications,
computers, intelligence, surveillance
and reconnaissance.

The company paid $580 million for Essex,
which in its last guidance to Wall Street in
2006 projected its revenue that year would
approach $300 million.

"This is just another opportunity to invest in
a company that has already proven to be a success,"
Northrop Grumman spokesman Dan
McClain said.

Columbia, Md.-based Essex, a provider of
optoelectronic imaging and signal-processing
services and products to the intelligence community
and defense agencies, had boosted its
value earlier by making some acquisitions of
its own before being snapped up by Northrop
Grumman in January 2007.

In 2005, Essex paid almost $70 million for
Windermere Group LLC, an Annapolis, Md.,
software and engineering firm with extensive
government contracts. It then paid $40.3 million
in 2006 for Adaptive Optics Associates
Inc., of Cambridge, Mass., a manufacturer of
complex optical products.

"We viewed their strengths in the areas of
signal processing, information assurance,
optics and optical processing, and systems
engineering and integration as a significant
complement to our work supporting the intelligence
community and the Defense
Department," McClain said.

Plan ahead

TechTeam Government Solutions Inc., a subsidiary
of TechTeam Global Inc., which made
two purchases in 2007, is another example of a
strategic buyer.

The Chantilly, Va., company acquired
NewVectors LLC, a provider of advanced
research, analysis and consulting services, in
May for $40.8 million. Three months later,
TechTeam GS bought RL Phillips Inc., a small
provider of government information technology,
network engineering and information assurance
services.

The acquisitions were the result of strategic
planning to broaden and improve the company's
offerings, said Dennis Kelly Jr., president
of TechTeam GS. "During 2006 and 2007, we
literally looked at dozens of deals, and these
opportunities were ones that [stood out] and
were very specific to our strategy."

RL Phillips' attraction was its expertise in
information assurance, Kelly said. The company
integrates security solutions for clients
including the National Security Agency, Navy
and Marine Corps.

"The skill sets that they have are very marketable,
in high demand and ... very hard to
find," Kelly said.

NewVectors' expertise includes business
transformation, logistics modernization, and
modeling and simulation services primarily for
DOD. It also provides supply chain engineering,
acquisition support, agent-based complex
systems and change management.

"NewVectors provided us with what I would
call the more front-end strategic thought leadership
part of enterprise systems development,"
Kelly said.

New Vectors was deep into the defense logistics
market, "which was a market we wanted to
be in," he said, because it is expected to grow
faster than any other defense area.

Follow the customer

IT solutions and services provider NCI made
two acquisitions in 2007 to expand its reach,
especially into the civilian and health care
markets.

Both transactions were strategic acquisitions
that NCI sought to meet its organic growth
goals, Glasgow said.

In February, the company bought
Operational Technologies Services Inc., a
provider of engineering and professional services
with revenues less than $10 million and
fewer than 100 employees. OTS' major client was the Federal Aviation Administration, an
agency NCI was targeting.

"Part of our long-term strategy, obviously, is
to have breadth and depth in all of our customer
areas, and they bring us access there to
people who really understand the FAA,"
Glasgow said.

The Karta acquisition targeted BRAC activities.
"We felt we needed to have a strong presence?
either through winning new business,
strategic growth or in selective situations, if we
could find the right companies through acquisitions,"
he said.

Karta is strong in medical
systems infrastructure
and transformation services,
especially with the Air
Force, Glasgow said. "When combined with
some of the things we have
in the Army health care
area, it gives us a really strong presence."

Karta brought along three governmentwide
acquisition contract vehicles, he said, including
the Air Force Design and Engineering Support-
2 contract. "That's a $1.9 billion GWAC, and
Karta is one of only six or seven primes on it."

"What really made this work is that the fundamental
philosophies of both companies were
basically the same," he said. "It was a fit culturally,
it was a fit business-wise, and it was a fit
strategically."

Eye on the niches

ICF International Inc. started its 2007 buying
spree in January, when it made Energy and
Environmental Analytics Inc., a small energy
market consulting firm in Arlington, Va., the
first of its four acquisitions. Three more deals
followed targeting health care, human capital
and transportation.

ICF bought Advanced Performance
Consulting Group Inc., a woman-owned firm in
Washington with about 30 employees, to supplement
its government consulting work in
human capital and organizational services, said
Doug Beck, director of corporate development
at ICF. "The federal government as a client base is traditionally about 80 percent of our work,"
he said.

Advanced Performance brought clients at
DOD, the Defense Information Systems
Agency, the National Institutes of Health,
and the Homeland Security and Treasury
departments.

ICF paid $35 million in June for Z-Tech
Corp., a 200-employee company that combines
software engineering with expertise in health
issues. The company is now a unit within ICF's
health care line of business, said Alan Stewart,
ICF's chief financial officer.

The deal boosted ICF's health care offerings
by combining IT expertise with substantive scientific
knowledge.

ICF capped the year in December by purchasing
Simat, Helliesen and Eichner Inc., a
large transport consulting firm, to enlarge its
transportation consulting line of business.

"We've got a sizable credit facility with our
banking group," Stewart said. "We were able to
leverage [the four deals] off our revolver [line
of credit]. It's all debt-financed."

A new player

Closing five deals in less than six months
brought plenty of attention to D.C. Capital
Partners and the company it formed to make
those acquisitions, National Interest Security
Co. Under the leadership of Thomas Campbell,
chairman of NISC and president of D.C. Capital,
the slew of deals landed the company at No. 4
on the list of the top 10 deals of the year.

The company was formed with the July 25
acquisition of three firms ? the Intelligence
Services Division of GAITS, Technology and
Management Services Inc. and Omen Inc. It
followed with Information Manufacturing
Corp. and Athenyx Inc. Dec. 11.

"We're looking to build a government services
platform with two verticals ? technology
management consulting and information management,"
Campbell said. A sixth acquisition is
pending, and D.C. Capital expects to launch
another platform company in the training and
logistics space.

When the sixth deal for NISC closes, the
company should have about $160 million in
2008 revenue. Campbell has brought in government
veterans Andrew Maner as chief executive
officer and James Van Dusen as CFO.

Maner most recently was president of ABM
LLC, a strategic advisory firm, and CFO at
DHS from 2004 through 2006. Van Dusen has
been a senior executive at Titan Corp. and CFO
at L-3 Government Services.

Their goal will be to make NISC's various
parts, which will remain independent operating
units, work together to fuel organic growth,
Campbell said.

"Under their leadership and with the operating
companies' presidents, they can grow the
company to $350 million in revenue in the next
two to three years," he said.

Already sounding like a strategic buyer,
Campbell said the executives look for acquisitions
they can build on rather than chasing the
whims of the market.

"Our perspective is long term, and we see
a tremendous amount of opportunity," he
said. "But we stick to the basics. We're kind
of boring."

David Hubler (dhubler@1105govinfo.com) is an
associate editor and Nick Wakeman (nwakeman@
1105govinfo.com) is editor-in-chief at Washington
Technology.

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