M&A activity faces sequestration hurdle

Sequestration and budget woes have cast a pall of uncertainty over the market, putting a damper on merger and acquisition activity.

As 2012 roars into its fourth quarter, merger and acquisition activity will play a major role for companies positioning themselves for the post-sequestration era.

But, the big question is, when that era will begin, and what it will look like?

Sequestration and its accompanying uncertainty is one of the biggest dampers on deals right now.

Investment bankers are telling me that there is plenty of activity, but the “neck narrows,” as one banker put it, when it comes time to close the deal.

The big reason is that no one has a clear picture of what the next six months will bring. That makes buyers hesitate to pull the trigger, and sellers are wondering if waiting a few months might bring them a better price or other terms.

The election in just over a month likely will not make things any clearer. No matter who wins the White House, it will be by a close margin and the split in the House and Senate will remain tight as well.

My best guess – and it is only a guess – is that the cloud of uncertainty will remain at least through the lame duck session. What congress does with sequestration is the deciding factor.

There is a growing consensus that sequestration will get a delay during the lame duck, and not a real solution. With the continuing resolution running through March, my hope is that sequestration will get put back into its box as congress works on the fiscal 2013 appropriations.

The uncertainty, of course, doesn’t mean that mergers and acquisitions have stopped completely. Deals are still getting done as you’ll see if you visit the M&A section of our website.

Some of the deals getting done, though, include extra provisions such as contingency clauses.

KEYW Corp. closed two deals in September, and one included payout clauses that will pay the seller another $3 million in cash if certain revenue targets are hit.

While these kinds of contingencies are not uncommon, there does seem to be an uptick in their use. It’s a good win-win for buyers and sellers, and the kind of thing that can push a deal over the hump during these uncertain times.

We are also seeing an increase in divestitures. Of course, Science Applications International Corp.’s spin-out of its IT and technical services business is current the poster child for that trend.

But other divestiture deals on a smaller scale are happening across the market, including SAIC’s sale of its test and evaluation business to American Systems Corp. and Lockheed Martin’s sale of its Savi Technology business to LaSalle Capital, which we didn’t cover. (D’oh!)

So the deal making continues, even in a tough market. Whether or not we match the 82 deals we tracked in 2011 remains to be seen, but whatever the final count, it won’t be boring.