Recapitalizing the government services and defense sector
- By Jerry Grossman
- May 03, 2002
By almost any standard, the public markets are more interested in the government services and aerospace and defense sector than any time in memory. This newfound affection is particularly startling, considering the widespread antipathy with which investors customarily view the government and defense sector.
Quality companies have seized the moment, leveraging this investor sentiment into new capital for them and their shareholders. During the past 12 months, we have seen a record volume of industry equity and security unit offerings in the public market, including initial public offerings and secondary offerings. These successful offerings have infused the industry with a significant new supply of outside capital.
Since spring 2001, four IPOs ? specifically ManTech International Inc., United Defense LP, Integrated Defense Technologies Inc. and Anteon Corp. ? have raised nearly $1 billion. Slightly more than half this capital was infused into the issuing companies.
Generally, these now-public entities have earmarked the new capital for reduction of interest-bearing debt or for future acquisitions. The institutional shareholders of United Defense (Carlyle Group) and Anteon (Caxton-Iseman) achieved significant returns on their original investments in these businesses, perhaps providing them with sound rationale to reinvest in the industry.
Just around the corner are pending IPOs of Veridian Corp. and SRA International Inc., prospectively raising about $300 million, principally for infusion into the issuers.
The magnitude of secondary offerings during the past year in the government services and aerospace and defense sectors was even more significant. Ten companies sold securities for aggregate proceeds of about $5.7 billion, adding more than 25 percent to their shareholders equity base and, more significantly, providing significant tangible equity, a basis for expanded borrowing capacity.
In the government services sector, six companies raised approximately $1.22 billion in secondary offerings. Of this amount, about $1.1 billion, or 90 percent, was invested in these companies, with the modest balance flowing to outside shareholders. CACI International Inc., Titan Corp. and Maximus Inc. raised between $125 million and $150 million each. Affiliated Computer Services Inc. completed a $648 million offering in September 2001, the largest in this sector. In addition, Computer Sciences Corp. completed a shelf registration in October 2001 for shares valued at $1.5 billion.
In the aerospace and defense sector, four companies raised more than $4.3 billion through secondary offerings of equity or equity security units. Over 97 percent of these funds flowed into the issuing companies. In five separate offerings, Raytheon Co. and Northrop Grumman Corp. sold more than $3.3 billion, with
L-3 Communications Corp. raising more than $800 million, including a $350 million convertible debt offering. Most recently, Raytheon filed a shelf registration for shares valued at $3 billion.
Collectively, public companies in the government services and aerospace and defense sectors (including the two prospective IPOs) raised approximately $7 billion during the past year, slightly more than the $6.7 billion of transaction values of acquisitions completed by these same companies in the past year.
Existing shelf registrations of $4.5 billion, combined with additional registrations likely in the months ahead, provide the foundation for potential acceleration of merger and acquisition activity in these sectors. Some increasing receptivity of the debt markets, including commercial banks, would add capacity on the buy side.
Industry buyers will remain disciplined in their valuations of their target acquisitions. Consequently, stubborn sellers, holding out for sky-high offers, could become an impediment to rational consolidation within the government services segment.
It is clear, however, that the public government services companies will continue to actively pursue an acquisition strategy to support the growth expectations of their investors. Accordingly, a liquid and attractive market for sellers will continue.Jerry Grossman is managing director at Houlihan Lokey Howard & Zukin in McLean, Va.
Jerry Grossman is managing director at Houlihan Lokey Howard and Zukin.