Expectations high for more dealmaking

Rising defense budgets, last year’s sharp reduction of corporate tax rates and overall optimism about the economy are fueling industry expectations of more mergers and acquisitions in the government market this year.

Those are among the high-level findings of a survey Tysons, Virginia-based investment bank KippsDeSanto conducted of 168 executives in the aerospace, defense and government services sectors. That group includes 103 leaders from corporate or strategic buyers and 65 professionals from private equity firms.

Three out of four dealmakers surveyed expect M&A transactions in the government services sector to increase by at least 5 percent this year from the 102 announced last year, which was up from 88 in 2016. One-fourth of respondents believe the number of government services deals will increase by more than 10 percent.

Slightly more than two-thirds believe defense sector deals will increase by at least 5 percent this year after two flat or down prior years. There is also a direct correlation to the budget environment as 83 percent called defense spending “extremely or very influential” to M&A activity.

That budget optimism drove several of the recent megadeals such as General Dynamics’ move for CSRA (and the bidding war for CSRA).

But new entrants are also coming to the fold like ASGN through its acquisition of ECS Federal and Belcan through its spree of acquisitions last year. KBR is recasting its government services business through a trio of deals focused on space and high-end engineering services. And Northrop Grumman is looking to grab a bigger share of a growing space spending pie through its deal for Orbital ATK.

There could be even more optimism in the short term through the two-year budget framework agreed upon earlier this year to raise spending caps for both defense and nondefense agencies. The omnibus for this government fiscal year provides $700 billion for defense and $716 billion for the next 12-month period.

So what are buyers looking for? Forty-eight percent said the addition of new capabilities, products or technologies is priority number one. Thirty-eight percent said adding new customers was the top priority, while 17 percent said scale was their first priority.

Respondents also see valuations rising as 46 percent expect an increase of between 5 percent and 15 percent from last year, while 49 percent expect valuations to stay the same as last year. Only 6 percent see valuations declining this year versus last year.