Although forecasting the federal market has become more complicated and more uncertain, the relative stability of both large and small contractors and their growth potential makes for sound investment.
Federal contractors must have strong attributes and depth to succeed amid slowing discretionary federal spending.
Management teams are rethinking their business strategies and making adjustments to their portfolios to ensure success in a turbulent economy.
Forecasting business and market performance is much harder these days. Federal information technology executives and investors seeking to set strategies and expectations have many more considerations than usual.
Recent turmoil in debt and equity markets highlights the contrast between federally oriented businesses and companies serving private-sector customers. It reminds us of the attractive, fundamental characteristics of the government services industry: stability, visibility, predictable cash flows and modest capital requirements.
The slowing of federal budget growth increases the competitive challenge for government contractors, especially for the companies that no longer qualify as small businesses. In this tough environment, a company's distinguishing characteristics become even more important.
Recent Small Business Administration actions aimed at substantial increases in contract awards to small businesses are colliding with market realities and, in manyinstances, are counterproductive to the government getting its work done efficiently and cost effectively.
SBA implemented a rule that became effective June 30, 2007, and requires companies that have been acquired to recertify their small-company status within 30 days of the deal closing. This rule has significantly altered transaction structures and valuations in the government services mergers and acquisitions market.
The small-business recertification rule implementedlast year by the Small Business Administration is havinga profound effect on companies that depend heavily onsmall-business set-aside contracts for growth and midtieracquirers of such companies, forcing both to focus more onorganic growth.
Since 2004, the price-to-performance multiples of publiclytraded government technology services companies havetrended downward, while the valuations of mergers andacquisitions have held their ground. Is this rational,sustainable and likely to continue through this year and the next?