70 deals shaping today's market

It often isn’t until we have the complete roundup of mergers and acquisitions for a given year that we realize how many important deals occurred in the government market.

At Washington Technology, we conduct an annual review of all the M&A deals that closed in the calendar year. And in 2016, despite the uncertainty of an election year and a relatively flat federal budget, the market still experienced a strong level of deal making with 70 closed transactions.

Among those deals, 10 stood out from the rest with three being tapped as best deals of the year by our panel of M&A experts drawn from several investment banks and law firms.

The top three deals of 2016 are:

• Leidos’s acquisition of the IT business from Lockheed Martin.
• ASRC Federal’s acquisition of Vistronix.
• Arlington Capital’s creation of a new platform through multiple deals.

Each of the three have notable differences but taken together they represent several of the over-arching trends driving today’s M&A activity: divestitures, strategic shifts, private equity activity, emerging technology needs, and the need for scale to name a few.

The biggest headline maker, of course, was the Leidos-Lockheed deal worth $4.6 billion. Lockheed Martin spent nearly two decades building its IT business through a large number of acquisitions. Leidos added scale and new capabilities in a big way.

ASRC Federal’s acquisition of Vistronix caught people’s attention for different reasons. ASRC Federal is the government contracting arm of the Arctic Slope Regional Corporation, an Alaska Native Corporation. While ANC’s have long been known for the prowess in the government contracting market, they haven’t been known to make significant acquisitions.

In many ways, Arlington Capital’s creation of Polaris Alpha is an old story in the M&A space: Private equity firm buys a company and creates a platform for more deals. But what they are pulling together are firms in a emerging areas of importance to the warifighter: cyber, the electromagnetic spectrum and space.

• KBR’s acquisition of Wyle for $600 million and Honeywell Technology Solutions Inc. for $300 million.
• CACI International’s deal for L-3 Communication’s National Security Solutions business for $550 million.
• Shipbuilder Huntington Ingalls acquired Camber Corp. for $380 million.
• Jacobs Engineering added the Van Dyke Technology Group.
• ManTech International closed two deals in 2016: the acquisition of Edaptive systems and the cyber business of Ocean’s Edge. Terms were not disclosed.
• Radiant Group was acquired DigitalGlobe
• Roper Technologies’ acquisition of Deltek for $2.8 billion

You can read more about these deals and why they were so important here.

But besides the top 10, there were several others on the list that are noteworthy.

We had a pair of companies – Phacil and JTG Inc. – convert to employee-owned companies. One of our M&A experts tapped the JTG deal as one of his favorites.

While not a traditional transaction, the purchase of a company by an employee-stock-ownership plan or ESOP does represent a viable alternative for owners looking to move on but not interested in seeing their company absorbed by another entity.

Another deal of note is the NTT Data acquisition of Dell Inc.’s services business. While the bulk of this is non-government, it still represents a significant transition for the Dell business. NTT Data should be an active force in the market going forward. They are one to watch.

There are also several divestitures on the list in addition to Lockheed’s sale of its IS&GS business.

Cobham divested its surveillance business to Marlin Equity. KeyW divested its SETA work to Quantech Services. General Atomics bought a business from Ducommun. Intelligent Decisions divested two of its business units.

All told there were 10 divestitures that we tracked in our roundup.

We expect many of these trends to continue in the coming year to 18 months. You’ll see strategic buyers either filling capability gaps or make larger deals to build critical mass in a certain sector. Private equity will remain very active both as a buyer and builder of platforms as well as selling business that they’ve built in recent years. Divestitures will continue as well as company look to sharpen their market focus.

Will we see any mega deals such as the Lockheed-Leidos transaction? Stay tuned. Credit is still easy. Many companies are sitting on a lot of cash. The defense market in particular is expected to grow. People will be making moves while the conditions are ripe.

In short, we look forward to a robust year of M&A activity.

Editor’s Note: Our roundup of closed 2016 deal is provided to us by the investment bank Houlihan Lokey. Our panel of experts are drawn from Houlihan and other investments banks - the McLean Group, Kipps DeSanto, Stifel Nicolaus, and Aronson Capital Partners - and the law firm Holland & Knight.