Mid-sized dealmakers look to replace lost revenue

Merger and acquisition activity among middle market government contracts has seen lots of changes in recent years and more is on the way.

"From the peak, we're down. No doubt about it," said Bob Kipps, managing director at the investment bank KippsDeSanto. speaking at the 13th annual Defense, Aerospace and Government Services M&A conference on Wednesday. The event is produced by the accounting firm McGladrey LLP and the law firm Pillsbury Winthrop Shaw Pittman LLP.

"It's been a slow year because of uncertainty and because of the compression of last year, but you're going to see now is a change in strategy," Kipps said. 

Larger companies have been telling him that the acquisitions landscape over the last few years has been small and strategic, with companies trying to buff out their cyber or health IT capabilities, but that's about to change.

"For now, there's bigger buckets of revenue that need to be replaced," Kipps said.

With the low-cost oriented market that the government services industry is in right now, it is impossible for a mid-size or larger company to cut costs with those smaller deals alone.

"It's going to become more financial engineering than strategic investment," Kipps said.

Larry A. Davis, a partner at Aronson Capital Partners, agreed with Kipps, saying that the only way to play the game in a low-price world is scale.

"Companies are going to need to consolidate in order to drive costs down. Certainly it takes a good management and investment to be able to operate at a lower margin environment, but at some point, you need more scale," Davis said.

"I think we'll be seeing more and more mid-sized companies consolidating and looking for acquisitions…buying good businesses to bulk up to leverage the overhead and infrastructure to be able to compete as a low cost provider," he added.