With M&A sluggish, what will drive & shape the market's landscape?
By
Ross Wilkers
Credit analysts at Moody's Investors Service view the last decade's mergers and acquisitions as helping build a more resilient group of companies, but they are looking at other factors as ones to shape the market amid the pandemic's pressure on deal activity.
Mergers and acquisitions in the government market and other sectors have certainly slowed down during the coronavirus pandemic, but one notable group of market watchers believes that deals done before the crisis have helped mitigate problems.
In a report issued Thursday, analysts at credit ratings agency Moody’s Investors Service wrote that the government contracting sector and particularly the defense-oriented subset of companies gained some resilience through “consolidation within the lower tier of defense contractors over the past decade.”
“The average U.S. defense contractor that we rate is simply a larger, better operated and more dynamic company than it was 10 years ago,” Moody’s analysts said.
And hence more resilient: not just through the current COVID-19 situation, but also the sector’s last major disruption period of fiscal years 2013 through 2016 that saw downturns in government services spending. Fast forward to today's environment, where Moody's acknowledged the moves agencies have made to keep facilities open and projects going.
What the pandemic has done to the debt markets is putting the brakes on a good portion deal activity even with the occasional announcement here and there, such as Monday morning's news from AE Industrial Partners about that investment group's latest transaction.
But there are three other factors Moody’s is calling attention to as ones that will further shape the market’s landscape.
One in the immediate term is how contractors and their agency customers will work through how the CARES Act stimulus law allows for reimbursements when work on contracts is disrupted by social distancing and other restrictions on gatherings of people in one place. Not being reimbursed in many cases are the fees that contractors bill agencies, which hits bottom line performance.
Factor number two, also for the immediate but impacting the longer view, is whatever happens with the federal budget picture. Near certain is a continuing resolution to keep the government running at current funding levels through the November election and leave the next budget to a new Congress.
Some CEOs of large, publicly-traded companies at least have talked to investors in recent times about the government’s focus on the economy and stimulus spending means rising deficits and how that might put a drag on defense funding levels.
Number three has more to do with the functions of government agencies and contractors in the current world of remote work and connected environments. Both sides of the public sector ecosystem have embraced virtually connected and geographically disparate workforces during the pandemic to keep the missions going.
While classified work is staying in secured facilities, that diaspora of workers outside their normal office environments also brings at least an increased risk of cyber incidents and latency issues. Moody’s expects federal agencies to rely on industry for help in securing networks and increasing mobile capabilities.