M&A special report | Rulers of the M&A game

The top two deals on this year's roundup ofmergers and acquisitions offer the best snapshotsof the types of buyers active in today'smarket.Leonard Green and Partners LLP's acquisitionof Scitor Corp. represents the deep-pocketedfinancial buyer looking for an investmentplatform in the government services market,and Northrop Grumman Corp.'s acquisition ofEssex Corp. embodies the established strategicbuyer looking to build market share and gainaccess to growing niches in the government.The Scitor and Essex transactions are justtwo of the 99 acquisitions that closed in thegovernment services market during 2007.That compares to 84 in 2006 and 100 in2005. Investment bank Houlihan LokeyHoward and Zukin Inc. compiled the roundupfor Washington Technology as it has each yearsince 2004, when 106 transactions closed. Apanel of M&A experts then picked the top 10deals.Financial buyers in this year's roundupinclude familiar private-equity groups, such asthe Carlyle Group and Veritas Capital, and newplayers, such as D.C. Capital Partners. They seethe government market as an attractive investmentbecause of its stability and steady cashflow.For strategic buyers ? including, in additionto Northrop Grumman, a virtual who's who ofthe government contracting world ? acquisitionshave emerged as a critical means forkeeping up with changes in the marketplace.Acquisitions represent a way to reach new customersand contracts in addition to followingchanges in government priorities.For example, NCI Inc., of Reston, Va.,acquired Karta Technologies Inc., of SanAntonio, to position itself for changes in thecoming years from base realignment and closure(BRAC) activities."We felt there were places like Huntsville,Ala.; San Antonio; and Colorado Springs,Colo., where the military presence will grow asa result of base closings elsewhere," said TerryGlasgow, president and chief operating officerat NCI.Northrop Grumman wasn't afraid to pay topdollar for Essex because it knew the companyhad a strong position in the lucrativeand hard-to-crack C4ISR market, whichstands for command, control, communications,computers, intelligence, surveillanceand reconnaissance.The company paid $580 million for Essex,which in its last guidance to Wall Street in2006 projected its revenue that year wouldapproach $300 million."This is just another opportunity to invest ina company that has already proven to be a success,"Northrop Grumman spokesman DanMcClain said.Columbia, Md.-based Essex, a provider ofoptoelectronic imaging and signal-processingservices and products to the intelligence communityand defense agencies, had boosted itsvalue earlier by making some acquisitions ofits own before being snapped up by NorthropGrumman in January 2007.In 2005, Essex paid almost $70 million forWindermere Group LLC, an Annapolis, Md.,software and engineering firm with extensivegovernment contracts. It then paid $40.3 millionin 2006 for Adaptive Optics AssociatesInc., of Cambridge, Mass., a manufacturer ofcomplex optical products."We viewed their strengths in the areas ofsignal processing, information assurance,optics and optical processing, and systemsengineering and integration as a significantcomplement to our work supporting the intelligencecommunity and the DefenseDepartment," McClain said.TechTeam Government Solutions Inc., a subsidiaryof TechTeam Global Inc., which madetwo purchases in 2007, is another example of astrategic buyer.The Chantilly, Va., company acquiredNewVectors LLC, a provider of advancedresearch, analysis and consulting services, inMay for $40.8 million. Three months later,TechTeam GS bought RL Phillips Inc., a smallprovider of government information technology,network engineering and information assuranceservices.The acquisitions were the result of strategicplanning to broaden and improve the company'sofferings, said Dennis Kelly Jr., presidentof TechTeam GS. "During 2006 and 2007, weliterally looked at dozens of deals, and theseopportunities were ones that [stood out] andwere very specific to our strategy."RL Phillips' attraction was its expertise ininformation assurance, Kelly said. The companyintegrates security solutions for clientsincluding the National Security Agency, Navyand Marine Corps."The skill sets that they have are very marketable,in high demand and ... very hard tofind," Kelly said.NewVectors' expertise includes businesstransformation, logistics modernization, andmodeling and simulation services primarily forDOD. It also provides supply chain engineering,acquisition support, agent-based complexsystems and change management."NewVectors provided us with what I wouldcall the more front-end strategic thought leadershippart of enterprise systems development,"Kelly said.New Vectors was deep into the defense logisticsmarket, "which was a market we wanted tobe in," he said, because it is expected to growfaster than any other defense area.IT solutions and services provider NCI madetwo acquisitions in 2007 to expand its reach,especially into the civilian and health caremarkets.Both transactions were strategic acquisitionsthat NCI sought to meet its organic growthgoals, Glasgow said.In February, the company boughtOperational Technologies Services Inc., aprovider of engineering and professional serviceswith revenues less than $10 million andfewer than 100 employees. OTS' major client was the Federal Aviation Administration, anagency NCI was targeting."Part of our long-term strategy, obviously, isto have breadth and depth in all of our customerareas, and they bring us access there topeople who really understand the FAA,"Glasgow said.The Karta acquisition targeted BRAC activities."We felt we needed to have a strong presence?either through winning new business,strategic growth or in selective situations, if wecould find the right companies through acquisitions,"he said.Karta is strong in medicalsystems infrastructureand transformation services,especially with the AirForce, Glasgow said. "When combined withsome of the things we havein the Army health carearea, it gives us a really strong presence."Karta brought along three governmentwideacquisition contract vehicles, he said, includingthe Air Force Design and Engineering Support-2 contract. "That's a $1.9 billion GWAC, andKarta is one of only six or seven primes on it.""What really made this work is that the fundamentalphilosophies of both companies werebasically the same," he said. "It was a fit culturally,it was a fit business-wise, and it was a fitstrategically."ICF International Inc. started its 2007 buyingspree in January, when it made Energy andEnvironmental Analytics Inc., a small energymarket consulting firm in Arlington, Va., thefirst of its four acquisitions. Three more dealsfollowed targeting health care, human capitaland transportation.ICF bought Advanced PerformanceConsulting Group Inc., a woman-owned firm inWashington with about 30 employees, to supplementits government consulting work inhuman capital and organizational services, saidDoug Beck, director of corporate developmentat ICF. "The federal government as a client base is traditionally about 80 percent of our work,"he said.Advanced Performance brought clients atDOD, the Defense Information SystemsAgency, the National Institutes of Health,and the Homeland Security and Treasurydepartments.ICF paid $35 million in June for Z-TechCorp., a 200-employee company that combinessoftware engineering with expertise in healthissues. The company is now a unit within ICF'shealth care line of business, said Alan Stewart,ICF's chief financial officer.The deal boosted ICF's health care offeringsby combining IT expertise with substantive scientificknowledge.ICF capped the year in December by purchasingSimat, Helliesen and Eichner Inc., alarge transport consulting firm, to enlarge itstransportation consulting line of business."We've got a sizable credit facility with ourbanking group," Stewart said. "We were able toleverage [the four deals] off our revolver [lineof credit]. It's all debt-financed."Closing five deals in less than six monthsbrought plenty of attention to D.C. CapitalPartners and the company it formed to makethose acquisitions, National Interest SecurityCo. Under the leadership of Thomas Campbell,chairman of NISC and president of D.C. Capital,the slew of deals landed the company at No. 4on the list of the top 10 deals of the year.The company was formed with the July 25acquisition of three firms ? the IntelligenceServices Division of GAITS, Technology andManagement Services Inc. and Omen Inc. Itfollowed with Information ManufacturingCorp. and Athenyx Inc. Dec. 11."We're looking to build a government servicesplatform with two verticals ? technologymanagement consulting and information management,"Campbell said. A sixth acquisition ispending, and D.C. Capital expects to launchanother platform company in the training andlogistics space.When the sixth deal for NISC closes, thecompany should have about $160 million in2008 revenue. Campbell has brought in governmentveterans Andrew Maner as chief executiveofficer and James Van Dusen as CFO.Maner most recently was president of ABMLLC, a strategic advisory firm, and CFO atDHS from 2004 through 2006. Van Dusen hasbeen a senior executive at Titan Corp. and CFOat L-3 Government Services.Their goal will be to make NISC's variousparts, which will remain independent operatingunits, work together to fuel organic growth,Campbell said."Under their leadership and with the operatingcompanies' presidents, they can grow thecompany to $350 million in revenue in the nexttwo to three years," he said.Already sounding like a strategic buyer,Campbell said the executives look for acquisitionsthey can build on rather than chasing thewhims of the market."Our perspective is long term, and we seea tremendous amount of opportunity," hesaid. "But we stick to the basics. We're kindof boring."