Buy? Sell? Or sit still?

I had a conversation with a semi-retired executive the other day, and he talked about the current state of the market. He’s a real optimist but he also a bit frustrated, which is one reason he is semi-retired.

He thinks this is a great time to be in the market and to be active. But too many people aren’t taking action.

Yes, there are budget issues and Congress is a mess. Agencies are squeezing primes, who in turn squeeze their subs. The industry is downsizing in the face of fewer new opportunities and the consolidation of contracts.

But at the same time, there is a technology revolution going on with the cloud, mobility and big data, which are all converging to change the way the government functions.

And contraction in the market creates opportunities for companies to make acquisitions and bring efficiencies and economies of scale, as painful as that can be.

But people are scared, particularly investors, he told me. Margins aren’t what they were four or five years ago, and they won’t get to that level again for years, if ever.

Companies are faced with three choices – buy, sell or sit still.

Too many investors, particularly in the private equity side, want to sit still and ride out this cycle, my source told me.

I bounced his ideas off of another source, this one directly involved in the private equity side, and he agreed.

Now is the time to move, particularly to invest and build with a focus on business development and capture and proposal activities. Companies with debt capacity should make strategic add-on acquisitions.

One strategy to avoid, though, is too much leverage, which will crimp operations and the ability to bid aggressively, he said.

Bu now is the time to be active. Once this period is done, the winners will be the companies that take action now, and not lament the lower profits and growth that marks today’s market.

In my mind, the “sit still” option is off of the table, or at least it should be.

So, do you buy or sell?

With the buying option, you’re taking action, adding capabilities or customers or contracts, or all of the above. I also put internal investments in infrastructure, new technologies and strategic hires in the buying category.

So buying is easy to justify, but I want to defend selling for a moment.

You can argue that what L-3 Communications did with Engility and Science Applications International Corp. is doing with SAIC and Leidos is a form of selling. Large pieces of business are being broken out – or are already broken out in the case of Engility – to create independent companies that have the potential to thrive that they didn’t have before.

We’ve also seen similar incidents where companies divest business units by selling them to other companies where they are a better fit.

But what we don’t see, and what I’ve always wondered why we don’t, is the merger of equals. Why don’t more companies of similar size join forces?

I’ve been told in the past that CEO egos get in the way, but can't the benefits of a combination overcome that obstacle? I would think so.

Others have told me it also has to do with ownership, especially if one or both companies are owned by a private equity group. In that case, the argument is usually about returns, and not about control in the c-suite.

In these challenging times, it seems a merger of equals might be the best alternative for companies that are of a certain size and struggling to get over the hump.

So, whether you buy or sell, now is not the time to sit still; if you sit, you might find yourself too soon on the sidelines, wondering how you got there.