Parsons reportedly kicking IPO tires

The government contracting market could be on the verge of breaking its long drought of true initial public offerings -- or where a company files for an IPO and actually goes through with it.

Reuters reported Thursday that Chantilly, Virginia-based engineering giant Parsons has made a confidential filing of paperwork to the Securities and Exchange Commission, a typical first step for any company exploring an IPO. An offering could launch in April or May with Parsons looking to raise up to $500 million in equity, according to Reuters. Employee-owned Parson has about $3 billion-annual revenue

A Parsons official declined our request for comment on that report. But market watchers view Parsons as having quickly emerged as a significant federal market player and particularly in the past decade.

An entry to the public markets would mark another large step in Parsons’ ongoing transformation of itself and give the government market its first true IPO since Booz Allen Hamilton in 2010.

Ever since, the well has pretty much run dry on contractors going public. Many other privately-held firms have done the required “S-1” filing with the SEC for an IPO, only to pull back later when another opportunity presents itself: either an outright sale or merger with another firm.

Vencore filed for an IPO in 2017 and then merged into what is now Perspecta, while Alion Science and Technology did the same in 2015 but was shortly sold afterward to Veritas Capital. Also in 2015, SRA International filed for an IPO but then merged into what became CSRA.

Vencore, Alion and SRA all were above the $1 billion-annual revenue threshold at the time of their IPO filings. Both in GovCon and the broader markets, a privately-held firm’s filing for an IPO is typically seen as a “stalking horse” signal that the company and its owner wants to make a deal.

“The majority of companies that reach scale in the GovCon market tend to sell since that is typically an easier and quicker path to liquidity for shareholders,” Greg Woodford of investment bank The McLean Group wrote to me in an email. “An IPO adds additional complexity since executives have restrictions on when they can sell their stock, and also have to worry about market risk and fluctuations.”

Those fluctuations in the broader financial markets led Caliburn International to announce this week a withdrawal of the IPO filing it made in October of last year. But Parsons’ current structure under an employee-owned stock ownership plan and overall industry optimism may help explain why it could be going down the path of an IPO.

"In a market in which valuations remain near all time valuation highs, the capital markets represent an attractive approach to affording the ESOP participants liquidity, and the company access to the capital markets to support continued strong growth," Marc Marlin of investment bank KippsDeSanto told me.

"Recent consolidation in the market has presented an opportunity for new public market entrants given the ongoing institutional investment interest in the space," said Marlin, a managing director at KippsDeSanto. Parsons' potential IPO, he added, "is just another data point around the current market strength and optimism looking forward."

Woodford -- a senior manager at McLean Group’s aerospace, defense and government services practice -- said mature ESOPs can take up a large portion of a company’s balance sheet.

The 2006 IPO of Science Applications International Corp. helps illustrate that issue Parsons may be facing. At the time of its IPO, then-$7.8 billion revenue SAIC reported it was spending almost $2.5 billion annually on the ESOP plan it operated since its 1968 founding.

ESOPs can grow in cost “due to the repurchase obligation of older employees retiring,” Woodford said, “So an IPO solves that potential issue.”

Then there is Parsons’ transformation of itself. In late February, the seven-decade old company moved its corporate headquarters from the longtime home of Pasadena, California to Chantilly in order to be closer to federal government and critical infrastructure decision makers in the Washington, D.C. region.

Sometimes called a "non-traditional strategic buyer," Parsons has also revved up its acquisition engine in the past decade to further build out its government and infrastructure businesses, which the company combined into one segment late last year as it views those markets as becoming increasingly converged in the physical and digital domains.

Its most recent deal in January for OGSystems added new geospatial intelligence offerings, while last year’s acquisition of Polaris Alpha brought to Parsons more of a space and cybersecurity footprint. Parsons has made seven acquisitions in total over the past 10 years that touch the federal and infrastructure markets.

One potential headwind for Parsons on the public markets initially could be that its main competitors in the engineering market have much larger scale, with AECOM at around $20 billion and Jacobs Engineering Group at $15 billion in their last fiscal years.

“Going public provides Parsons with additional horsepower to compete with these companies both organically and for strategic acquisitions since they will have the ability to raise capital in the public markets to compete more effectively,” Woodford said.