What SRA's IPO says about today's market
Whenever I read a company’s filing for an initial public offering, I reach the section called Risk Factors and I come away thinking, why would anyone invest in this market?
I had that feeling as I read SRA International’s S-1 filing. The company plans to go public to raise capital to pay down debts. It’s not that SRA is a bad company. To the contrary, when I’ve talked with investment bankers they say that SRA’s numbers compare well to its peers in the market.
It’s more that IPO filings give such a clear-eyed, no BS, view of the government market. The risk factor section in particular offers a good description of the current business environment all contractors face. And as you know there are risk factors aplenty in the market.
In the case of SRA, they describe a variety of risks:
- Budget cuts
- Changing priorities
- Delays in the passage of a budget
- The federal debt limit
- Contract options that aren’t renewed
- Canceled contracts
- Bid protests
- Organization conflicts of interest
- Contracts shifted to small businesses
- New rules and regulation
Alion Science and Technology also has recently filed for an IPO and its risk factors are similar to SRA’s.
Any government contractor can related to the lists in the two filings. But the risk factors SRA and Alion identify also speak to how much the market has changed in the last decade.
As a comparison, I looked at the S-1 filing for Stanley Associates, which went public in 2006 and was later sold to CGI Group and CACI International.
Their risk factors reflect a very different atmosphere. Budget reductions are mentioned but performance and maintaining good customer relationships are seen as more important risk factors.
The drawdown in Iraq and Afghanistan hadn’t started yet, but Stanley notes that defense spending levels are not sustainable. They rightly identified that as a risk.
But while they do talk about the possibility of budget cuts the entire risk section is very different.
Both filings, for example, talk about delays in Congress passing a budget. Stanley says that the defense budget for fiscal 2006 wasn’t passed until Nov. 15, 2005. That’s about six weeks of a continuing resolution. They saw that as a risk.
Today, if there was budget by Nov. 15, people would rejoice.
Think about fiscal 2015. The final spending bill wasn’t passed until Dec. 11, 2014. Fiscal 2014 was even worse – the government shutdown in October 2013 and a final budget wasn’t approved until Jan. 14, 2014.
The passage of the budget is now a major risk factor for government contractors.
I went back to SRA’s IPO filing from 2002, when it went public the first time. [It went private in 2011 when it was acquired by Providence Equity Partners.]
The 2002 filing is very similar to Stanley’s 2006 filing. Most of the risk factors focus on their own performance. The risk factors related to government actions come much later in the section. In SRA’s and Alion’s 2015 filings, the order is flipped. The budget and policy risks involving government and congressional action, or lack thereof, come first, then the section shifts to more of internal risks the companies face such as its ability to perform and maintain customer relationships.
The sense I get is that in 2002 and 2006, companies controlled their own destiny much more than they do today. Yes, Congress was slow to act but you always knew it would be a matter of weeks, not months until that uncertainty was cleared up. In hindsight, it doesn’t look like that much of an uncertainty.
Companies knew that their destiny was tied more closely to their own abilities and not as much to what has not become a dysfunctional Congress.
Performance is more critical today because competition is so intense, but the conditions that contractors cannot control have grown exponentially.
How the budget battles for fiscal 2016 and 2017 unfold will tell us a lot whether the market is shifting back toward more predictability or whether the risk factors of the last few years will remain in place.
More specifically to SRA and Alion, how they are received on Wall Street also will tell us a lot about the risks investors perceive in the government market. While no one should manage their business according to how Wall Street will react, an IPO’s reception is about how investors view the future.
That could be an important message for all of us.
Posted by Nick Wakeman on Jul 16, 2015 at 9:33 AM