What can you learn from DRC's acquisition of HPTi?

The M&A market is now tipped in favor of attractive sellers

Dynamics Research Corp. completed a $143 million cash acquisition of High Performance Technologies Inc. or HPTi in June.

The deal – which was one of the largest M&A activities so far this year – didn’t involve a giant contractor acquiring a small or mid-size firm to gain access to a major federal contract or to add a specific service to its offerings.

But the deal did offer a couple of important lessons for companies looking for a purchaser, said Bob Kipps, managing director of investment bank KippsDeSanto, which represented HPTi on the sale.

Quality is attribute No. 1

“There’s been an underlying flight to quality from the buyer community,” Kipps said, citing as drivers current federal budgetary concerns, the debt ceiling standoff and government insourcing plans.

“Eighty percent of the buyers and investors are looking at 10 [percent] to 20 percent of the parties that are available,” he said. “They are all looking for the A players to pull onto their team.”

HPTi was a prime, five-star company ready for sale, Kipps said. “It had the critical mass size-wise. It had depths in the areas that are [industry] buzzwords – cyber, cloud computing, health IT, intell. It also had no blemishes.”

It also was big enough to be attractive to the largest firms in the industry.

“They were intrigued with – and ultimately DRC fit this profile – being a transformation deal for a mid-sized company that sort of thought of themselves in no-mans’ land size-wise. At the same time they were large enough to be a platform for a private equity entrant into the marketplace as well," Kipps said. 

HPTi reported $90 million in revenue in 2010 with nearly 80 percent aligned with DRC's target growth markets: cybersecurity, intelligence, civilian financial agencies and homeland security, according to DRC's announcement in June.

Don’t run your company on a shoestring

Kipps said prospective sellers should be aware of possible pitfalls before they put a for sale sign on their business. Those pitfalls often include a lack of preparation or an under-investment in the processes, infrastructure and talent in the business.

“Sometimes the lack of investment in the management team or in systems can create problems unbeknownst to our client. Then issues arise that should have been known about and resolved years ago,” Kipps said.

“Either they didn’t spend enough time documenting a piece of intellectual property or they didn’t properly execute a contract because they didn’t have the know-how or the depth to do that. It’s usually an under-investment in talent or in systems,” he explained.

Take your foot off the brake not the gas

HPTi CEO Tim Keenan was ready to execute the exit strategy because the company was growing at a double-digit pace and was approaching the $100 million mark in revenue. Keenan and his executive team knew HPTi could be even more successful not going it alone.

“When a business gets above $50 [million] to $100 million, entrepreneurs’ natural conservatism sometimes pulls their foot off the [accelerator],” Kipps said. But that’s when a transaction often makes sound business sense, Kipps explained.

“They had a goal to be a $500 million business” and the DRC purchase instantly accelerated HPTi into a $400 million company, he said. “This was essentially the deal of a lifetime for that management team and so they wanted to make sure it was done correctly.”

So did the DRC executive team.

Although DRC had to overcome obstacles, including securing financing for such a large acquisition and incorporating HPTi’s 440 employees, it won because it made the acquisition a high priority, Kipps said

“DRC’s market cap was about the same as what they paid for HPTi,” Kipps said.

But DRC “did everything right with respect to courting the company, participating in the sale process, or transaction process. They put an attractive set of terms on the table. And not just price – they really listened very closely to what our client was trying to achieve." 

Keep your eye on the prize

Keenan and his late co-founder had put contingency plans for HPTi in place years earlier, Kipps said. “It always had contingency plans, backups, depths, succession plans – really a lot of attributes of a world class professional services organization.”

That made it easier when Kipps and his team spent many hours poring over the details with HPTi executives – and later with prospective buyers.

Nevertheless, Kipps said, when the sale of a company involves the founder, it’s not just about the numbers.

“It’s about the legacy, it’s about the cultural match. It’s about roles and responsibilities. And so there’s a lot of education, a lot of time spent with our client and our client with different [prospective buyers] to understand what the post-deal environment would be like.”

As a result of the merger, Keenan reports to DRC Chairman and CEO Jim Regan as corporate development and strategy adviser. And HPTi COO Scott Miller continues to oversee HPTi operations, also reporting to Regan.

Dynamic Research Corp., of Andover, Mass., ranks No. 93 on Washington Technology’s 2011 Top 100 list of the largest federal government contractors.

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