Rethinking the pure-play mandate

Most prospective buyers in the government servicesmarkets are seeking pure-play, federal-oriented targets.These acquirers are either already focused on thefederal segment and want to expand there or theyare seeking to enter the federal arena. This approach essentiallyinvolves sticking to the market you know.Many industry veterans recall the early1990s, when defense companies undertookdiversification strategies into commercialmarkets. The result of those initiatives wasaptly described by Norman Augustine,Lockheed Martin Corp.'s chief executive officerat the time, as a record unblemished bysuccess. Since 2001, the supply of pure-playfederal services companies has generallystayed abreast of buyer demand.But circumstances began to change in2007. Increasingly, so-called dual-marketcompanies are emerging as the best targets.It may be time for buyers to look moreclosely at companies that are successful infederal and commercial markets.Several good reasons exist for buyers torethink their acquisition parameters. First,the supply of attractive pure-play governmentservices companies has thinned. Six years ofactive mergers and acquisitions haveremoved most of the established small tomidsize companies from the landscape.Newer federal contractors are usually ladenwith small-business preference contracts,which throws cold water on their salesappeal.Second, the development and implementationof subject-matter expertise and technologyalong with management concepts areoccurring in government and commercialmarkets. Accordingly, companies with in-depthexpertise in sought-after disciplineshave achieved success in both markets.Third, the pace of growth in federalspending is slowing. The upcominggeneral elections have increaseduncertainty about government prioritiesin 2009 and beyond. Effectiveparticipation in growing nonfederalmarkets could provide some upsidemomentum to offset anticipatedslowing in many federal segments.This is not to suggest that participatingsuccessfully in dual marketsis without challenges and risks ?only that an increasing number ofacquisitions of this type are being done.Some areas of deep expertise that lendthemselves to multiple markets are: A few recent transactions are examples ofthis trend. SRA International Inc.'s acquisitionof Constella Group in August gives SRAa provider of health services to governments,corporations and nonprofit entitiesin more than 100 countries. Constella's subject-matter depth meets priority needsacross markets. In addition, ICFInternational Inc.'s recently announcedacquisition of Jones and StokesAssociates adds expertise in resource management,planning and implementation.Also in August, Science ApplicationsInternational Corp. acquired BenhamInvestment Holdings, an engineeringand life cycle technology implementationcompany that serves corporateand federal markets. Benham hasexpertise in energy management andalternative fuels in addition to software,integration andadvanced visualizationsystems.In each instance, theacquired company hadproven its ability to selleffectively and gainrecognition in its commercialmarkets whilebeing successful withfederal customers.Many federal acquisitionofficials prefer todeal with companies that are successfuloutside federal markets.Finally, fewer buyers are pursuing dual-marketcompanies, frequently providingbuyers a less congested sale environment. Itmerits some thought.