Inside STG's acquisition and its new path forward

By the end of September, STG Group Inc. will be a publicly-traded company thanks to its $165.5 million acquisition by Global Defense & National Security Systems Inc. However, the closing of that transaction is not an end, but a new beginning.

After talking with STG and GDEF executives, it was clear that STG’s owner, Simon Lee, and GDEF leaders see the combination as a perfect fit for what both companies want to accomplish.

For Lee, becoming a public company was always part of his vision for STG, according to Paul Fernandes, STG president and chief operating officer. Once the deal closes, Fernandes will continue to hold those titles.

For GDEF, STG is the platform it has looked for since launching as a special purpose acquisition corporation in October 2013.

The upper mid-teir (companies with $200 million plus in annual revenue) is “very thin,” said Dale Davis, GDEF president.

STG’s size, contract mix and capabilities have it well positioned for growth, he said. The company holds positions on some of the largest task order contracts in the market such as Alliant, CIO-SP3, DHS Eagle II, and Army ITES-2S as well as a variety of GSA schedules. STG also is ranked No. 89 on the 2015 Washington Technology Top 100 list of the largest government contractors.

Another thing going for STG is Lee; he isn’t going anywhere. While he won’t carry the title of CEO, he will be the chairman of the board and the largest single shareholder.

SPACs like GDEF have a window of time to find the right platform, and a critical element of that platform is senior leadership who want to stay on board.

“You have to find a seller who doesn’t really want to sell,” Davis said. “There aren’t a lot of target companies that have an owner who wants to stay with the business and see it continue to grow.”

“Going public was always a step Simon wanted to accelerate the growth of the company,” Fernandes said. “We will continue to leverage what we’ve built over 29 years.”

GDEF brings a strong track record for building through acquisitions. It was the original backer of Sotera Defense Solutions. They took that company public, closed several acquisitions and then sold it to a private equity group.

“We’ll bring plenty of dry powder for M&As to STG and a team that specializes in M&A and has a significant track record in the defense and intelligence space,” Davis said.

Since forming in October 2013, GDEF has worked on parallel tracks as it looked for two types of companies to acquire. First, it needed the platform, which means a company with the right scale, contract mix and capabilities. They found that in STG.

At the same time, they’ve also been active looking at follow-on acquisitions, companies that would bring new capabilities, contracts or customers, Davis said.

He admitted that it took longer to find the platform, in part because their requirements limited their choices but also because of market conditions. In late 2013 and early 2014, few deals were getting done. Activity has picked up significantly in the last six months, Davis said.

“We were lucky to make this deal with STG,” he said.

Because they are no longer looking for a platform, the second deal will come much more quickly. Davis said he expects they will at least sign an agreement for another acquisition by the end of the year.

The company is looking at targets with cybersecurity, software development and big data analytics, he said. Customers in the intelligence community are also a plus.

As a public company, STG will be on the small end of the spectrum, which makes finding that next acquisition critical to keeping investors engaged, Davis said.

But the STG platform isn’t just about making acquisitions. Fernandes said the company is poised for strong organic growth as well.

The company has $300 million in submitted bids with decisions on awards expected before the end of the government fiscal year on Sept. 30. It also expects to submit other bids totaling into the hundreds of millions of dollars before the end of the fiscal year, Fernandes said.

“The last four or five months have been very active particularly around software development, cybersecurity and the intelligence community,” he said. “We are excited and expect a lot of those proposals to turn into revenue for STG.”