Internal focus paramount as firms consider M&A during a pandemic

Publicly-traded companies aren't turning their back on mergers and acquisitions during the pandemic, but some see opportunities and others are taking a thoughtful pause.

With some exceptions, many publicly-traded government contractors have indicated over the past month in earnings calls with investors that closing acquisitions has become more difficult or perhaps not top of mind during the coronavirus pandemic.

One notable exception: Perspecta closed its acquisition of DHPC Technologies on May 1 and will explain that deal's rationale on May 21 during a fourth quarter and fiscal year-end earnings call with investors.

Analysts asked the question and here is a sampling of how some chief executives in the corporate strategic buyer landscape have answered regarding both the overall M&A landscape and their companies’ own places in it.

CACI International’s John Mengucci (April 30)

“In the near term, we're more operationally focused as are companies who (we) might be looking at. So for us, M&A has taken a temporary hiatus as a result. And when I say we're at a hiatus, 60 to 90 days at really doing financial modeling and the like. Our company is going to look slightly different coming out of this. Other potential companies will as well.

“But don't take that to mean, we're not looking at potential acquisitions and pursuing relationships. We still have the phone. We still have webcasting, we're able to meet and go out there and still continue to touch companies that we were already out there touching prior to COVID-19. That allows us to better understand how they're coping with it, how resilient are they, and the like.”

Huntington Ingalls Industries’ Mike Petters (May 7)

“The issue right now is that valuations are just, I'd almost say, mythical. To try to get to a fair value of a business, that's a hard read. We are still interested. We haven't changed our posture.

“But let's just take -- if ‘Acme’ is out there and suddenly their share price got wiped out by this volatility, the board of Acme still would think that they're worth a lot more than their share price is.

“So trying to engage in that is really pretty challenging. But we're going to keep looking, and we're kind of leaning forward to try to find ways to make something out of it.”

KBR's Stuart Bradie (April 29)

"We have to be very cognizant of liquidity in this environment. We have very clear strategic objectives and we're always looking, whether organically or acquisitively, to move faster towards those goals. But we'll only do it if it makes sense. We'll only do it, if we've got a lot of confidence around cultural and strategic fit. But also we'll only do it in today's environment from a liquidity perspective, if it makes perfect sense.

"I do think we've got to be a bit more considered. I do think the capital markets today have to settle down. There's no doubt about that. Raising debt and things like that, even with our improved credit rating, would be expensive.

"But we are looking very carefully longer term. This is a moment in time, there will be more disruption I'm sure, and with disruption there comes opportunity.

"I think, keeping our powder dry, not getting out in front of ourselves and taking on silly projects and things like that, has really positioned us well to take advantage of any opportunity into the future. So would M&A be a good part of our future? I hope so, but it's got to be under the right circumstances."

ManTech International’s Kevin Phillips (April 29)

First from his opening remarks:

“The M&A market has slowed as a result of the COVID pandemic disruption. With that said, we anticipate M&A activity to increase as we recover from the pandemic. We are in an excellent position to review opportunities as they arise.”

Then this in response to an analyst question:

“We maintain the same posture that first of all, we want to prioritize M&A for our use of cash, but we also want to be selective because at our size and how the government procures. There are more than enough white space areas and capabilities that we can invest in and go after $100 million plus procurement as the prime contractor and grow our business.

“We have not, as a company, seen a path or a need to diversify into product or to work towards scale. There are some bids at the enterprise IT level that may restrict us in the future based on the size of those, but they may not. So the short answer is no. Longer answer is we thought it through, and we think we're in a good position.”

Maximus’ Bruce Caswell (May 7)

“We continue to look at really tuck-in type acquisitions and I thought it might be helpful to maybe give a better sense of the criteria.

“We generally say it needs to meet criteria including number one: being closely aligned with our current business. So it's really no more than one adjacency away.

“Number two: it has to be available at a reasonable price and under agreeable terms. In this current environment, there certainly are smaller businesses that are having more of a struggle and that can create opportunities for us, to add capabilities and not just here in the United States but even overseas.

“The third criteria would be, we don't want any kind of tuck-in to create significant transaction or integration risk, or effort or expense for us. So we've historically executed these tuck-ins really in all kind of economic conditions, including now in a tactical manner to position the company for anticipated growth in new business areas, to add capabilities, to position ourselves into new geography.”

Mercury Systems' Mark Aslett (April 28)

First from his opening remarks:

"The M&A market is effectively shut right now, given the challenges associated (with) determining asset values, pricing risk and conducting forecast diligence. Once we get through the crisis, we anticipate seeing more opportunities than before. Certain companies may be motivated to sell in this environment."

Then this in response to an analyst question:

"It could be a catalyst for certain companies that maybe push them over the edge in terms of whether they're on the fence of deciding to sell or not. If they do, I truly believe they're going to want to join a company that has done the right thing during this crisis, that is well positioned for continued growth, that is fiscally sound and growing and has got great cultures and values.

PAE’s John Heller (May 7)

“With the debt markets not really supportive in a beneficial way of what we can do to actually execute those kinds of deals, we’ve really put a pause on the M&A and just focused on operations, focused on cash right now, and waiting for the debt markets to return to something more normal where we can see a light on refinancing our own debt as a priority and then looking at strategic add-ons after that.

“We’re hopeful that will turn around in the coming months, but right now we don’t see that. We’ve seen several deals get pulled back and processes not move forward. We have seen some deals go forward where buyers are willing to put lots of equity on the table and are in a very low debt position that they’re able to execute something like that. We still see this as a great part of the growth strategy for PAE and we expect to be active as the market recovers.

Parsons Corp.’s Chuck Harrington (May 12)

“I think that we still have an appetite. There's still some great companies out there that we're in discussions with. During this period, I think you'll see a bit of a pause as we probably have already seen in industries. One can't really do proper due diligence when we can't get into the offices and meet with people one-on-one, and I think that is an essential thing that has to take place, at least from our perspective.

“And we need market multiples to settle out a little bit. I think both us and sellers want to make sure that they know that there's some stability around market multiples. I do imagine that there will be companies who aren't in the same place we are from a balance sheet perspective that may accelerate their thoughts around selling or divesting parts of their business, and I think that will probably result in increased opportunity.”