Input: M&A activity remains robust in government IT market

With 118 mergers or acquisitions taking place, 2005 was an active year in the government IT and defense markets, according to a white paper released today by the market research firm Input Inc., Reston, Va.

The "2005 Public Sector IT Merger and Acquisition Activity and Market Valuations" white paper shows that 63 deals were made by buyers making multiple acquisitions.

Leading the way was a trio of companies expanding their service offerings with at least five acquisitions: General Dynamics Corp., Falls Church, Va., L-3 Communications Holdings Inc., New York and Lockheed Martin Corp., Bethesda, Md.

"These large hardware-oriented contractors continue to invest in the IT services market where relatively high return on assets and invested capital balance businesses with higher capital investment requirements," said Willliam Carrier, a member of the Input Consulting Group and former vice president of business development and strategic planning at Northrop Grumman Information Technology.

Other companies making multiple purchases in 2005 include CACI International Inc., Arlington, Va.; DRS Technologies Inc., Parsippany, N.J.; ChoicePoint Inc., Alpharetta, Ga.; EDO Corp., New York; MTC Technologies Inc., Dayton, Ohio; Northrop Grumman Corp., Los Angeles; QinetiQ Group PLC, Farnborough, U.K.; Science Applications International Corp., San Diego; SRA International Inc., Fairfax, Va.; and The Veritas Capital Fund L.P., New York.

Roughly two-thirds of last year's deals targeted the security and defense markets, with a focus on military communications, sensors and signal processing technologies.

Acquisitions averaged a healthy multiple of more than 1.4 times revenue where terms were disclosed, the report stated. Many of the sellers earning high valuations added new intelligence and homeland security customers to their buyer's account base.

One trend uncovered in the report was the smaller size of many buyers and sellers in the 2005 market. For the 85 deals where seller revenue was available, two-thirds of sellers had revenues of less than $50 million. Of the 20 buyers with multiple acquisitions in 2005, six had revenues of less than $300 million: Alion Science and Technology Corp., McLean, Va.; ICF Concord, Calif.; Indus Corp., Vienna, Va.; I.T.S. Corp., Oxnard, Calif.; McNeil Technologies Inc., Springfield, Va.; and MTC Technologies Inc., Dayton, Ohio.

Smaller and mid-size companies looking to become competitive with larger companies can buy their way into new customers, which is often more profitable than direct competition for contracts with larger companies, said Ken Johnson, a member of Input's Consulting Group and a former president of domestic operations for CACI.

Past performance and customer experience are keys in getting new contracts for companies selling in the public sector space, and so those conditions are the driving force behind much of the current activity, the report concludes. Input expects that such conditions will continue to drive a robust merger and acquisition market for the next three years.