Inside the latest high-energy M&A engine
We’re used to companies like CACI International and Lockheed Martin making multiple acquisitions each year.
But every now and then, a new buyer emerges, seemingly from nowhere, and closes a string of deals that make you stand up and take notice.
A couple years ago, it was KEYW Corp. and Novetta Solutions. Last year, it was Vistronix.
And this year, it just might be Preferred Systems Solutions, which has put its acquisition engine into high gear, closing three deals in the last nine months, and its leadership isn’t shy about declaring that more acquisitions are in the works.
It closed the acquisition of Government Contract Solutions Inc. this week after buying Global Solutions & Services in August and Envision Technical Services in April. Financial terms of the deals were not disclosed.
But PSS is no overnight sensation. When I spoke with CEO Scott Goss, I was surprised to learn that the company has been owned by the private equity group CM Equity since 2007, but before 2014, it had only made one acquisition, and that was in 2009. The company itself has been around since 1990.
Goss became CEO of PSS when CM Equity bought the company from its founder Robert Hisel, whom Goss had worked with for a few years after a stint as an executive with General Dynamics, a position he landed through a series of acquisitions. GD had acquired Veridian, where Goss was an executive. He joined Veridian after it acquired Signal Corp., where he also was a senior leader.
Goss laughed when I asked him what had changed; why the sudden M&A activity after nearly seven years of relative silence. He was quick to remind me that CM Equity is not a typical private equity firm. “They want to make a return on their investment, but they are very patient,” he said.
The PSS story also is emblematic in many ways of the government market. The company is a former 8(a) small business, and it had to transition from that program to the full and open world. Many companies never survive that period.
“When we got this company, it was a completely different company,” Goss said.
Forty percent of its work was from 8(a) set aside contracts; 30 percent was small business; and 25 percent was staffing for other government contractors.
“Nearly all of that business went away,” Goss said. “We had to spend a lot of time and energy rebuilding, retooling and creating something new.”
After its first acquisition of Integrated Network Services Inc. in 2009, the company was looking for more deals but wasn’t finding the right fit. In many ways, it was still trying to figure what kind of company it wanted to be. Layer on top of that the overall downturn in the government market, he said.
But Goss also admits that the company’s efforts were not vigorous enough on the mergers and acquisition front. And he knew that.
A year ago, he went to CM Equity’s leadership with an ultimatum of sorts.
“I said, here’s the deal: We need to pull up our big boy pants and go out and buy,” Goss said. “Either we do that, or we are just going to die on the vine, struggling and fighting tooth and nail for every scrap of business we get.”
The company needed to get “serious and get out there and start doing deals. We had to show people we are hungry and active,” he said.
But Goss isn’t just willy-nilly buying companies. He articulated a clear strategy and CM Equity agreed. Within months, the first deal closed.
“We want to focus on a few things,” Goss said.
Intelligence will be a core part of the business. The goal is for it to be 50 percent of revenue. With the GCS acquisition, it stands at about 30 percent.
“So, we are closing in on that goal,” he said.
He declined to disclose PSS revenue, but the headcount has grown from 160 at the close of 2013 to 330 today.
In the intell area, the company is focused on cybersecurity and information assurance.
A second part of the strategy is to continue to build on its software development skills. Here, the customer set isn’t as important. “I don’t care who we are doing it for,” he said.
The company’s skills are in high-end IT work such as virtualization, storage and the cloud, he said.
The third area is in enterprise resource planning, which is a backbone capability for the company, and comprises a wide range of work including consulting, systems development, customization and implementation.
The GCS acquisition expanded work with intelligence community by bringing in new customers. It also brought skills in software development, IT, ERP and program management that complemented existing PSS capabilities, he said.
GCS also added Homeland Security Department and General Services Administration customers.
“They were strategic in terms of customers, in terms of work and they have growth,” he said. GCS’s organic growth is close to 25 percent.
The company also brought a strong management team.
The management team also was an important part of the acquisition of Global Solutions & Services, along with the Navy customer it serves.
Jim Ballard, now president of PSS Federal Services Group, came over with the GSS acquisition. He was president of that company. He also was president of Perot Systems Government Services.
Building its management team is a critical part of his growth strategy, Goss said.
With the acquisition of Envison Technical Services, its founder, Joseph Rexrode joined the company as senior vice president. He’s one of PSS’s biggest promoters. “He’s always out raising the flag,” Goss said.
Nicole Geller, CEO of GCS is not joining PSS, but the rest of the management team is, he said.
The company also hired Fred Funk, a founder of KEYW, as senior vice president to manage its intelligence portfolio.
“You have to have the management team to continue to grow,” Goss said.
Having an active acquisition strategy is critical in today’s market, especially for emerging mid-sized companies because acquisitions are the best way to gain new customers and organic growth is very hard to come by, Goss said.
And once a company is out of the small business categories, it is going to go head-to-head with much larger companies.
“You need critical mass and the past performance to go up against the big boys,” Goss said.
With an energized M&A strategy and plenty of acquisition targets in its sights, it looks like PSS is on its way to getting the mass and the qualifications it needs to compete.
As they make acquisitions, the key will be how they integrate the companies (another core capability according to Goss as PSS does back office integration for other companies) and what kind of contracts they win going forward, but I’ve definitely elevated them into the category of a company to watch in 2015.
Posted by Nick Wakeman on Dec 11, 2014 at 9:24 AM