Eye on M&A

Federal market offers safe harbor

The worldwide economic turbulence has
dealt only a glancing blow to the defense
and federal government mergers and
acquisitions market, with big, mid-size and
small deals moving forward. The U.S. government
gave its approval to Italian
defense firm Finmeccancica SpA's $5.2
billion acquisition of DRS Technologies
Inc.; Serco Group plc stepped closer to
closing its $423 million acquisition of SI
International Inc.; and D.C. Capital
Partners' government platform, National
Interest Security Co. (NISC) LLC, bought
Multi-Threaded Inc. (MTI) for an undisclosed
amount.

Such continued action in the federal
and defense market is not unusual.

"The federal and defense sector isn't
completely recession-proof, but it's a
more stable place to be than the commercial
marketplace," said Ray Bjorklund,
senior vice president and chief knowledge
officer at McLean, Va., market researcher
FedSources Inc.

In the past five recessions, the sector
outperformed the S&P 500 by 42 percent,
according to a September report
by Rockville, Md., investment bank
Aronson Capital Partners LLC. The company
bases its comparison on stock valuations
for four top government and
defense contractors.

Investors should look for strategic buys
in "fast-growing markets, including cybersecurity,
health care [information technology],
intelligence community, homeland
security" and a broad spectrum of
defense technologies, Aronson said.

INTELLIGENT MONEY

The Office of the Director of National Intelligence
reinforced that advice, pegging
spending on the National Intelligence
Program in fiscal 2008 at $47.5 billion,
up 9 percent from the previous year's
$43.5 billion.

That growth in intelligence spending is
music to the ears of Thomas Campbell,
founder of private equity firm D.C. Capital
Partners LLC and NISC chairman. NISC's
purchase of MTI is the ninth in 14 months.
Campbell was a partner ? with Robert
McKeon ? of Veritas Capital and cofounder
of the Veritas Capital
Fund from 1992 through 2006,
when he left the company to
found D.C. Capital and, with the
purchase and merger of three
intelligence technology companies,
NISC. Six subsequent purchases
have added to the company's
intelligence capabilities.
For example, MTI helps extract
intelligence from data and media sources.

"It's a smart strategy, based on close
observation of the market," Bjorklund
said. "You delve into the market statistics
and learn that the intelligence budget is
growing at a significantly faster rate than
the rest of the federal spending budget,
that the demand is not only for military
intelligence and special programs but also
for homeland security intelligence work.
You find an unsatisfied demand and position
yourself to meet it."

Campbell knows this sector well. In
2001, he was at Veritas when it bought
Vertex Aerospace from Raytheon Co. for
$270 million and sold it two years later,
for $650 million, to L-3 Communications
Corp. He also was involved in Veritas' $20
million purchase of the scandal-plagued
intelligence and counterterrorism
provider MZM Inc., its rebranding as
Athena Innovative Solutions Inc., and subsequent
sale in October 2007 to CACI
International Inc. Athena had estimated
earnings of $110 million in fiscal 2007.

Coincidentally, Campbell was instrumental
in developing Integrated Defense Technologies
Inc., which Veritas sold in 2002
for about $550 million to DRS Technologies,
currently on its way to becoming
a Finmeccancica asset.

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