Inside the biggest M&A deals of 2011

The number of transactions dropped in 2011 but their power to transform is undiminished

When we look back at the merger and acquisition activity of 2011 several themes emerge.

None is as prominent as the role private equity firms played. Of the 82 transaction we tracked 26 involved private equity backers.

Another important trend was the number of divestitures that occurred during 2011, with 14 transactions falling into that category.

But whether it was private equity, divestitures or traditional strategic buyers making deals, transformation was very much on the minds of those completing transactions in the past year.

While this year’s total of 82 deals is down from the 99 we tracked in 2010, the critical role that mergers and acquisitions play in the market has not diminished. And following what is bought and sold is still one of the best barometers of how the market is adapting and where companies are investing their resources.

SRA International’s acquisition by Providence Equity Partners was picked by our panel of M&A experts as the single biggest deal of the year. It is noteworthy both for the role of private equity played and the transformation it has brought to SRA.

The value of the transaction was by far the biggest of the year but that was significant only because it shows that in the current market private equity buyers are looking at larger acquisitions.

As 2010 came to a close, SRA was facing several challenges, mainly that its strategy to become a provider of high-end systems engineering services was bearing fruit. The strategy, which included one costly acquisition, proved to be a distraction from SRA’s traditional professional, technical and IT services roots, said Ernst Volgenau, SRA’s founder and chairman.

“We lost focus on our core business. That was our problem,” he said.

Providence came in with the highest bid, and also agreed to keep SRA’s name, values and culture. “That meant a lot to me,” Volgenau said.

Since the acquisition, SRA has brought in a new CEO in Bill Ballhaus and has divested several businesses so it can focus on the core IT services business. It also now is a private company and doesn’t face the quarterly grind of earnings reports and Wall Street expectations.

“We were public for nine years and I enjoyed it, but I’m enjoying being private again too,” he said. “We can focus on building the business in a strategic way.”

Another private equity deal worth noting is Ares Management LLC’s acquisition of Global Defense and Technology Solutions, which has been renamed Sotera Defense Solutions. Similar to SRA, Global Defense was a public company and was taken private. That acquisition was picked as the best private equity deal of 2011.

Since its acquisition by Ares, Sotera has made two other acquisitions to build a larger intelligence business and shift more of its business from products to services and solutions. Again, the theme of transformation.

Transformation was very much at the heart of Dynamics Research Corp.’s acquisition of High Performance Technologies Inc., which was picked as the best acquisition by a midsize company.

“We are a greatly strengthened company because of the capabilities, solutions and customers we picked up,” said Jim Regan, DRC’s chairman and CEO.

HPTi, which DRC bought for $143 million, had major health IT customers particularly at Veterans Affairs. “Health care is a big part of our growth strategy and we had military health pretty well covered, but VA is what we were looking for,” Regan said.

The company also brought high performance computing and computation science capabilities, which will help DRC move deeper into cloud computing and cybersecurity.

With the acquisition, two-thirds of DRC’s business is now in growth markets such as health, cybersecurity, finance and regulatory, intelligence and homeland security. “But homeland security really is maturing so that might move out of being a growth market for us,” Regan said.

While no acquisitions are currently in the works, Regan said DRC is likely to look at areas such as cloud computing and mobile computing for future acquisitions.

“We think we have the right strategy for growth and what HPTi did for us is shave a couple years off our growth plan, so our growth has accelerated,” he said. “In our minds this really did transform us.”

2011 also saw its fair share of companies making multiple transactions. CACI International was picked as the best dealmaker of the year because it closed three deals. But it also performed well overall, which really impressed our panel of experts.

Paul Cofoni, CACI CEO, said that the acquisitions accelerated the company’s growth in cybersecurity and in the business systems and government transformation market.

“Mergers and acquisitions is an important component of our growth strategy, bringing us new capabilities in emerging high-demand market areas,” Cofoni said.

Besides CACI, 14 other companies made multiple deals including KEYW Corp. (3), Ultra Electronics (3), and Raytheon (3). Sotera was both bought and then was a two-time buyer. SRA was bought and then sold a business.

With the number and high-profile nature of some of the divestitures in 2011, we added a best divestiture category to our list of top deals.

Getting the nod this year was Cobham plic’s sale of Sparta Inc. to Parsons Corp. for $350 million. Cobham said it was facing more pressure because of changes to the U.S. government’s organizational conflicts of interest regulations. It also said that increased competition “diluted the strategic benefit” of keeping Sparta.

Parsons gets a healthy business that provides advanced systems engineering, cybersecurity and mission support services to the Defense and Homeland Security departments, and the intelligence community, all areas that are expected to grow.

Another divestiture worth noting is Lockheed Martin’s sale of Pacific Architects and Engineers, a company Lockheed acquired several years ago, but it never produced the results the company desired.

While we’ve looked back at the deals that closed in 2011, M&A activity is about the future and moving forward. Companies are investing in cyber, health care, intelligence, business transformation, energy, environmental services and other niches that they believe will drive their growth going forward.

For those fearful of a contracting government market, dealmaking is one area that should drive optimism.

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