Sellers' expectations high in hot M&A market and public companies don't like it

The government market's merger-and-acquisition landscape continues to run hot and so are what sellers hope to fetch. Public companies are pointing to those high expectations as a reason for not going forward with deals.

The annual Credit Suisse Industrials Conference often draws government contracting executives whose presentations inevitably turn to the environment for mergers and acquisitions, and this year's edition saw two major GovCon mainstays share their thinking on their M&A strategies.

What they said reflected a theme that many of the publicly-traded GovCon firms have highlighted in recent weeks: Sellers can have lofty expectations in an overall deal landscape tilted in their favor if they do find a buyer.

Example number one is Booz Allen Hamilton, which is near the end of its current “Vision 2020” era and has gone to work on the next iteration of how the company sees itself and the market it participates in.

Whatever comes out of that new strategy executives anticipate they will detail next year will likely not include one component that has driven the government services market in recent years: a large, transformative acquisition.

That does not mean the firm is necessarily sitting on the sidelines regarding potential deals. Speaking at Credit Suisse’s Industrials Conference on Tuesday, Booz Allen Chief Financial Officer Lloyd Howell said the firm does “look at over 100 opportunities every fiscal year” and “bids on at least a half-dozen of them.”

“In today’s environment with pricing being where it is, as well as multiples, we haven’t made it necessarily to the final round, but we are looking at deals as they become apparent and as we are able to cultivate them,” Howell told investors in attendance in Palm Beach, Florida.

Booz Allen’s M&A strategy instead favors acquisitions of the tuck-in, capability-based variety that the company can more easily integrate into its culture. Only three have taken place in the firm’s current Vision 2020 era that involved its core government business: Epidemico in 2014 for added health analytics capabilities, SPARC in 2015 for more agile software work, and Aquilent in 2016 for increased digital service offerings.

But McLean, Virginia-based Booz Allen also has been on the kind of organic growth path it views as an alternative to the type of larger, more transformative deals that other companies have undertaken in the current round of government services consolidation.

“For us, it would be off strategy, it’d be hugely distracting and take our eye off of the things that we’re most focused on, which is our clients and our people,” Howell said.

Howell was the second executive at the conference to note elevated expectations of sellers as a dominant theme in the government market’s merger-and-acquisition landscape.

Enter example number two here. Leidos CFO Jim Reagan told the Credit Suisse audience that his company’s corporate development staff and leaders in its business groups are “continuing to look at opportunities where we can create value because we find undervalued assets,” or assets “that might be fairly valued but we can create more value with revenue and cost synergies that fit with our strategy.”

What might be fairly valued in the market does not necessarily equate to the price Leidos is willing to pay, however. The company has already done one transformative deal involving Lockheed Martin's IT services business three years ago and another one that variety does not appear to be in the cards again.

“We’re going to maintain a lot of discipline to ensure that we don’t overpay for something. We’ve looked at opportunities, we’ve bid on opportunities. We haven’t won them because we didn’t want to pay what the clearing price ended up being,” Reagan said.

That observation mirrors what Leidos CEO Roger Krone said during the company’s most recent earnings call on Oct. 29. Krone told analysts then that the company is casting its net far and wide to see what is out there, but sometimes finds that the business being looked at is not as advertised and/or wants a high price in a sale.

Leidos is continuing to show some interest in businesses with a product or hardware offering that could include higher-margin defense electronics, Reagan said.

“The ability to embed the products that you’d be buying with these companies, embed them as part of a solution that has a services tail to it could be really interesting as well,” Reagan added.

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