Are M&A deals heating up?

In the last month, we’ve covered seven acquisitions, three of them just this week. It got me thinking, are we going to see a rush of mergers and acquisitions like we did last year?

Well, the short answer is “No,” but it is a little more complicated than that.

It is important to remember what was happening as 2012 closed and how that drove the deal making we saw last year.

The fiscal cliff was looming and with it was a feared expiration of the capital gains tax. If the rate expired, the tax hit sellers would take would soar. The pressure was on many interested sellers to get deals done avoid the increased tax burden.

Of the 103 transaction we tracked in 2012, 42 closed in the last quarter, with 20 of those in December.

But while we’re seeing an uptick in the last few weeks, it won’t match last year.

When I took an informal poll of several investment bankers, they agreed that there has been increased activity but it is more about setting the stage for 2014.

2013 was marked by both buyers and sellers sitting on the sidelines, but the expectation is growing that 2014 will be a return to normalcy as far as the pace of M&A activity.

In other words, buyers and sellers are getting more interested in making deals.

But interest may not translate into closed deals; especially for the general IT services businesses. You might want to sell, but who’s buying?

Interest remains strong for cyber, big data, mobile, cloud and health IT. Vistronix closed two deals this week that involved cyber and big data companies in the intelligence market, another hot niche.

CACI International closed the biggest deal of the year with the $830 million acquisition of Six3 Systems, a company with about 75 percent of its work in the intelligence market.

But for sellers outside of the attractive markets, the deal making will continue to be tough, especially as long as the federal budget remains murky.

With factors such as lowest price contracting, increased small business requirements and procurement delays coupled with the budget, buyers just don’t have enough visibility and certainty to make acquisition unless they are in those critical market niches.

But once a budget deal is struck, especially one that brings more predictability to the 2015 budget and beyond, we’ll see more M&A deals getting done.

I’ve had been told by more than one executive that there is over capacity in the services market and it can only be rationalized by consolidation.

But no one knows how to make the consolidation strategy work until there is more budget certainty.

So I’ll calm my excitement over this recent burst of closed deals and hope that we get a budget deal that’s more than a continuing resolution by Jan. 15.

We need that no matter whether we are buyers, sellers or just trying to find a way forward.