Ross Wilkers

M&A

Parsons sounds more hopeful about settled M&A landscape

Due diligence being figured out creatively

What’s around the corner remains uncertain, but public equity markets have gradually settled into more stability compared to the beginning of the coronavirus pandemic in mid-March when they nosedived quickly and were volatile with a capital "V."

Parsons Corp. sees that dynamic as in turn settling the landscape for the pace to pick up on acquisitions in the government market. During Parsons’ second quarter earnings call Wednesday, CEO Chuck Harrington told investors that situation is true for both sides of a potential transaction.

It also means that buyers like Centreville, Virginia-based Parsons are figuring out how to conduct due diligence and value prospective targets in a world with COVID-19: a very different perspective compared to how he and some other CEOs described the environment back in the spring.

“All companies are getting a little more comfortable in how we can operate in a safe environment, maintaining social distancing, using masks and disinfecting tables and conference rooms,” Harrington said. “

“We can do a lot of this (diligence) virtually but two, we’ve even found ways now where we feel more comfortable going into spaces and conducting in-person due diligence. That combined with the fact that the stock market has gotten a little less volatile.

“I think that sellers have a little more confidence that they know where things are settling out as well as buyers have a little more confidence where they think multiples are settling out,” Harrington added.

Mergers and acquisitions in the market have not completely evaporated amid the pandemic’s continued overhang over the entire economy, even as some government contractors did previously say they were taking a timeout from closing deals to focus on internal matters like execution.

Some of that pause owes to the fact that due diligence work takes longer when performed remotely, although Parsons now certainly feels differently as the pandemic emergency enters month number six. Booz Allen Hamilton executives said in their most recent earnings call Friday that they hold the same view, although Booz Allen and Parsons also have specifics they look for.

What Parsons is looking for remains in the same four markets Harrington reiterated to analysts on Wednesday: cybersecurity and intelligence, space and geospatial, missile defense and “C5ISR,” plus what he called “connected communities” that involves using technology to improve urban infrastructure.

Technology areas of interest continue to include artificial intelligence, autonomy, cloud computing and Internet of Things sensors.

“We continually look for those companies that have software-hardware IP (intellectual property) and either they’ve converted quite a bit of that into either hardware-software sales, or as-a-service-sales, or we believe it provides us the building blocks we need to do that ourselves,” Harrington said.

Despite some second quarter headwinds from COVID-19, Parsons held to its financial outlook for this year at $3.95 billion-to-$4.05 billion in revenue and $330 million-to-$360 million in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization expenses).

Sales for the three-month period fell 1 percent from the prior year period to $979 million in a decline that included $67 million in disrupted contract work because of COVID-19. If the pandemic was not around, Parsons said its organic growth rate would have been 5 percent.

Chief Operating Officer Carey Smith said of that $67 million, around $40 million is getting reimbursed through the CARES Act that lets contractors recover the cost of keeping employees in a ready-state but not the fee that represents profit. But the largest disruption Parsons cited within its federal solutions segment was not in the intelligence community.

“The major impact was our FAA (Federal Aviation Administration) program, which we’re now starting to see recovery, the projects are restarting up,” Smith told analysts.

Parsons also sounds hopeful that the ongoing final quarter of the federal government’s fiscal year ending Sept. 30 will be a boon to the backlog that was reported as $7.7 billion as of June 30, down from $8.5 billion a year ago.

“We’ve not seen a material slowdown in either prime contract or task order awards,” Harrington said.

About the Author

Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at rwilkers@washingtontechnology.com. Follow him on Twitter: @rosswilkers. Also find and connect with him on LinkedIn.

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