Will lightning strike again for Global Strategies Group?

I’m always looking for signs that there will be a positive turn in the market, so when I got a pitch for an interview with Dale Davis of Global Strategies Group, I couldn’t say no.

Global Strategies Group, and its founder Damian Perl, were the backers of Global Defense Technology & Systems Inc., or GTEC, now known as Sotera Defense Solutions.

As the backer of GTEC, Global Strategies Group saw the company through several acquisitions and an initial public offering. They remained a major shareholder after the IPO, but sold their shares in 2011 when the private equity group Ares Management acquired GTEC and took it private.

Since 2011, the U.K.-based Global Strategies Group has stayed on the sidelines of the government services market, though it owns other companies, primarily working in the Middle East and Asia.

“We took a step back (from the U.S. government market),” Davis said. “There was a great deal of uncertainty in 2011 and 2012.”

As investors, they also felt that seller expectations about valuation were not realistic, he said.

“We haven’t been idle,” Davis said. “We looked at a lot of opportunities, but we felt it wasn’t yet the time to invest.”

But that’s about to change, said Davis, who in addition to his role as executive vice president of Global Strategies Group, is now the CEO of Global Defense & National Security Systems, or GDEF.

I missed the launch of GDEF in October, when it had an IPO as a special purpose acquisition company, but it raised $72 million with which to buy a platform. If it can’t make a deal in 21 months, it’ll have to return the money to investors, Davis said.

I don’t think the deadline will be an issue.

“We have a clear thesis,” Davis said. “While the U.S. defense and intelligence budget remains flat, there are large areas of decline and large areas of growth.”

The market has more clarity now, and seller expectations are more reasonable as well, he said.

The company will focus on big data analytics, cybersecurity, mission critical systems (primarily C4ISR) and defense modernization.

Of particular interest are companies with what Davis called “technology-enhanced” services. “We are absolutely looking for companies with intellectual property,” he said.

The intellectual property will be in the software arena, not a tangible product that goes into a box and is shipped to the customer.

“We are looking for companies with solid client relationships with key agencies in the defense and intell space,” he said.

They’ll face competition for those kinds of acquisitions, but Davis said that the size of companies they will pursue will likely be too small for the larger acquirers, such as the Lockheeds and the CACIs of the world.

“A deal in the $100 million to $150 million range just doesn’t move the needle for them,” he said.

Also, there are a lot of sellers who don’t want to be swallowed up by a large, multi-billion dollar company, and with its track record with GTEC/Sotera, “we have a compelling story to tell,” he said.

The plan is to roll up three or four acquisitions over the next three to five years and create a $350 million to $400 million company that will then be an acquisition target for a large buyer, Davis said.

“We can put something together that will have the scale and breadth to be very attractive to our customers as well as future investors,” he said.

For sellers, there is the opportunity to take some equity out now, and become part of a larger organization with the potential for a larger return down the road, Davis said.

In other words, GDEF wants to buy companies where the bulk of the senior management team wants to continue on. In fact, Davis said he doesn’t expect to keep the CEO title for long.

It’s hard for me not to see this as a positive sign that the market is turning, or is going to start turning. The GDEF strategy is an example of the moves I described in my blog about the new budget deal and the clarity it is bringing to the market.

Of course, these are still challenging times, but there are also plenty of opportunities as well.