Dealmaking survives tough times

There have been years with more acquisitions. In 2006 and 2007, the number of deals topped 100 each year.

But there have been years with much fewer. In the late 1990s, the market typically saw not much more than 30 deals a year.

There is little controversy about this year’s pick for best overall deal. Northrop Grumman Corp.’s sale of its TASC unit to General Atlantic and Kohlberg Kravis Roberts stands out for multiple reasons.

First, it was a large deal worth $1.7 billion. Second, it also brought in new private equity firms. And third, TASC as an independent company is large enough that it should be a major player as a company competing for contracts and as an active acquirer.

One of the values we find in the annual M&A roundup is the trends that appear by gathering all these transactions into one place.

Although the list contains 77 deals, there are signs that the economy had an effect. Although there are several large deals on the list, many of the transactions involved small companies with less than $50 million in revenue.

Some of the large and more serial acquirers of past years slowed in 2009. For example, CACI International Inc., which generally closes one or two deals a year, does not have any. Lockheed Martin Corp. has only one, instead of the usual multiple deals. The same is true with QinetiQ.

There are multiple reasons for this slowdown, and the reasons are healthy ones for the market. For one, companies often need to take a break to digest acquisitions and clean up balance sheets.

Companies also sometimes take breaks or slow their acquisition activity because of uncertainties in the market. Those uncertainties were compounded in 2009 by the shaky economy and the transition to a new administration. Add in the highly partisan atmosphere on Capitol Hill, and it is little wonder that companies are cautious about where they place their bets.

But with 77 transactions listed on our roundup, deals obviously were getting done. Nine companies closed two deals each. Four of those companies — AT Solutions Inc., Camber Corp., Six3 Systems Inc. and Secure Mission Solutions — are all backed by private equity. That is noteworthy because it shows the continued interest of private equity in the government market.

It also shows the evolution of these companies from being financial buyers to more long-term, strategic buyers, competing with companies such as Lockheed Martin Corp., CACI and ManTech International Corp. One investment banker described such companies as hybrids because their focus extends beyond just making deals to add bulk to thinking strategically about their acquisitions.

Another trend is the low activity level of foreign buyers during 2009. Cobham and QinetiQ closed one deal each. But BAE Systems and Serco, active buyers in past years, closed no deals in 2009.

Uncertainty about the direction of the U.S. defense market is one reason M&A observers cited for the low number of foreign buyers. In addition, the defense hardware market in the United States might have drawn more attention than the service sector did.

A final observation I’ll make is the legacy of BearingPoint Inc. Deloitte’s acquisition of BearingPoint was named our best midtier deal, but BearingPoint also was part of three other transactions. Because of conflicts with its audit business, Deloitte couldn’t acquire pieces of business that BearingPoint had in New York and Texas and with a certain federal customer. So other buyers — Attain Inc., Keane Inc. and NIC Inc. — stepped up.

It is a bittersweet tribute to BearingPoint’s government business. Although the company was imploding, the public sector remained a strong and valuable business.

These observations are by no means the end of the discussion. Share your comments below.