Are performance drivers shifting in the GovCon market?

After several years of cash-focused strategies emphasizing things such as efficiencies and margins, investors are once again demonstrating serious interest in the growth strategies of companies that do business with the U.S. government.

After several years of cash-focused strategies emphasizing overhead efficiencies, increasing margins, and returning cash to shareholders, investors are once again demonstrating serious interest in the growth strategies of companies that do business with the U.S. government.

Their renewed interest is spurred by the projected growth in spending by many large agencies, such as the Department of Defense, which has seen its budget grow to $716 billion in fiscal 2019. This increased investor attention has executives searching for ways to improve their firm’s overall performance characteristics.

To do so, these firms face significant strategic choices: Should they focus on improving the scale of their government business? Should they concentrate in their core market areas or diversify to new customers?

A recent study in the Journal of Marketing, Uncle Sam Rising, provides important insights for managers as they decide on strategic activities to improve their outlook to Wall Street.

The research study investigated the stock returns of over 1,300 public companies between 2000 and 2016 that did business with the government and measured the impact of revenue received from the federal government on firm value (magnitude of return) and firm risk (variability of return). The results of this work are informative for executives doing government business in terms of a) should you strive to scale and b) how do you manage your customer portfolios. In terms of drivers of firm value, investors appear to offer greater financial incentives to “purist” companies whose government work is 30% or greater of their book of business when compared to “tourist” firms that have lower levels of government business, illustrating the value of scale. The benefits of scale are enhanced when the firm focuses on a small set of important customer groups. Investors value concentrated customer portfolios over customer diversification, at least in terms of firm value.

However, there is a dark side of striving for scale for government contractors, often referred to as GovCon companies. The study found that firm risk (projected variability of firm cash flows) increases the more they focus on government customers.

In other words, investors become worried when companies become too dependent on the government as its major source of revenue. Managers can mitigate this concern with two types of customer management strategies: building a diversified portfolio of government customers and building deep relationships with its key government customer accounts.

While the findings of this study are not specific to mergers and acquisitions, the recent frenzy of M&A activity by government contractors might offer evidence that executives agree with the studies core findings.

From Northrop Grumman’s purchase of Orbital ATK to SAIC’s plan to acquire Engility to L-3’s announced merger with Harris, companies are clearly looking to M&A to help them grow their businesses and generate additional value. Generalizing the core findings of the study’s findings further, firms apparently need to consider how a target firm’s portfolio of government agencies matches with that of the acquirer in addition to any scale benefits. When SAIC CEO Tony Moraco announced the acquisition of Engility, for example, he noted the “highly complementary portfolios, combined with our similar cultures, operating models and histories,” as a central part of his rationale for the transaction.

Another trend that appears in line with these findings is that platform-focused purists are focusing on transactions that enhance their depth in the GovCon market. Moves by Lockheed Martin, Northrop Grumman, and L-3, for example, have varied in size and scope but all have focused on growing their core defense portfolios.

Additional analysis is needed to fully explore the impact of these and other transactions on long-term company value. Nonetheless, these trends appear to align with the principal conclusions of the focal academic study that it is critical to be a purist rather than a tourist in the GovCon market and that the combination of scale and, in particular, customer depth and breadth are important determining factors of financial performance, both in terms of firm value and firm risk, in the GovCon space.

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.