Inside Octo's deal to go deeper into open source
Octo Consulting acquires an open source development firm to align with changes they see in how defense agencies buy software as all markets appear to be shifting in that direction. Just look at IBM-Red Hat.
One of the most visible middle-tier market players, Octo Consulting has quickly pulled the trigger on their first acquisition since private equity firm Arlington Capital Partners first backed them in April.
Reston, Virginia-based Octo announced Tuesday it has acquired software development firm Connexta in a deal both sides see as creating a stronger footing in national security and particularly with open source, just as that type of work is being increasingly mandated across defense agencies.
“We’ve seen a lot of acquisition strategies that are changing and adding open source requirements,” Connexta CEO Andy Goodson told us Thursday. “As recently as five years ago, there were less requirements. In fact, the government agencies were afraid of open source.
“Now they’re starting to realize the benefit of that, they’re starting to see how the commercial sector is embracing it and how that really is the way of the future. Now we are seeing entire programs coming out that are based on open source.”
The commercial sector’s embrace might also be a perfect allegory for what Goodson said is going on in the government and defense market. Just look what IBM did earlier this year, as Octo CEO Mehul Sanghani pointed out in that same phone interview.
“I don’t know if anyone could have predicted about a decade ago that when Red Hat was entering the market, that they would be acquired to the tune of $34 billion by IBM,” Sanghani said. “That speaks to the level of commercial adoption and how mainstream it’s become.
“It also adds relevance and credibility to the fact that you are seeing an increasing number of government customers look to that as they look to unwed themselves from traditional enterprise license agreements as well.”
The military’s push toward an open source future is nothing new and partially dates back to 2009, when the Defense Department launched a website to develop open source software. A more recent move in that direction came from the 2018 National Defense Authorization Act, which included language to add DOD as a federal agency that should prioritize open source software.
“You’re starting to see that in a lot of different organizations… outside of DOD as well,” Goodson added.
Those are the steps on the customer side. For Octo, the addition of Connexta is the latest step in an ongoing push to be an even more formidable, differentiated player in the middle tier with the support of Arlington Capital. Octo’s workforce grows by 130 people to around 700 with offices at its Phoenix headquarters, plus Boston and Denver.
This transaction by Octo is also an example of active dealmaking activity among mid-tier players, of whom nearly “every one is either thinking about buying or selling,” said Bob Kipps, co-founder and managing director of investment bank KippsDeSanto that advised Connexta.
“Almost no one is doing nothing,” Kipps added. “It’s a very active market with a very broad, deep set of buyers.”
Prior to this deal, Octo’s acquisitions were mostly limited to those for contract vehicles like the Navy Seaport-e position it acquired from Aquilent in 2017 or other smaller more tactical plays.
“Private equity is allowing Octo to become a major mid-tier player much faster through adding a lot of additional capital,” Kipps said.
Sanghani cited the Air Force and National Geospatial-Intelligence Agency as examples of mutual customers where Octo and Connexta worked on adjacent programs. Connexta brings to Octo software labs that house the open source development work, plus services in data interoperability, geospatial intelligence and “C4ISR” for defense organizations.
That is just the U.S. geographic footprint, however. Connexta also has contracts to support coalition partners in Europe, Asia and Australia.
Australia is a member of the broader “Five Eyes” intelligence community that also includes the U.S., U.K., Canada and New Zealand. The group of international partners in that list often faces the same technological challenges as U.S. agencies regarding the open source development model, according to Goodson.
The next step for Octo is much like what many mid-tiers have in mind: finding opportunities “to compete and punch above (our) weight class… against the much larger players we have in this market,” as Sanghani said.
That includes seeing how customers are changing the ways they acquire technology services from industry, plus what Sanghani described as “differentiated capabilities” that can be put forward.
“In addition to doubling down and looking at how we can continue to differentiate and compete up relative to capabilities, we also looked at customers that have increasing demand aperture that we’ve already been fortunate enough to serve successfully,” Sanghani added.
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