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By Nick Wakeman

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Nick Wakeman

Don't buy the consolidation hype

You have to love a well thought-out contrarian viewpoint, even if you don’t agree with it 100 percent.

In their latest Practitioner Perspectives, Wolf Den Associates takes on the conventional wisdom that companies in the government market have to participate in the consolidation trend in order to grow.

Wolf Den doesn’t buy that argument and they use the Washington Technology Top 100 to make their case.

They broke the list into quartiles. The top quartile with 25 companies in it dominates the market, but Wolf Den’s analysis shows that the percentage of contract dollars those 25 firms receive has shrunk over the last 10 years from 78 percent to 71 percent.

Meanwhile, the amount of business in the other quartiles grew on a percentage basis, with the fourth quartile (companies ranked No. 76-100) saw their percentage of revenue grow by more than 30 percent.

Another part of their argument against the prevailing wisdom of consolidation is the large number of divestitures the market has seen in recent years. They have a Top 10 from the last year or so and there are some big deals here. Include PwC’s carveout of what is now Guidehouse, the creation of Perspecta from a DXC Technology divestiture and accompanying merger, and moves by Fluor and AECOM to sell their government services businesses. They call that 10 Divestitures to Remember.

There are couple areas in which I disagree somewhat with Wolf Den’s argument.

One is the shrinkage of the top quartile. I don’t think they recognize enough that many large companies saw significant revenue loss because of the drawdown of operations in Iraq and Afghanistan. Large companies bore the brunt of the drawdown. The market also went through a period of sequestration at the same time. But I don’t think I can argue that sequestration hit large companies more than it hit small and mid-tier firms.

Another sign of the consolidation of the market is how many brand names disappeared from the Top 100. A couple years ago, I analyzed who from the 2003 Top 100 was still on the 2017 Top 100. An astonishing 69 names were gone.

But I don’t think Wolf Den is arguing that consolidation isn’t happening. They are just arguing that consolidation doesn’t automatically translate into growth. Bigger isn’t always better.

Their perspective piece injects a dose of skepticism into the prevailing wisdom pushed by many like myself: companies have to be active acquirers in order to grow. They offer a warning about investment bankers and their incentive to push the bigger is better view.

Wolf Den argues, and I agree, that you should first stay true to your strategy and not let headlines about big deals make you susceptible to FOMO -- Fear Of Missing Out. Don’t let that fear drive you to make a deal too soon.

They also recognize in their piece that the market is complex. The drivers and impact of consolidation is “complicated,” the word they use to describe the nature of the market.

The key takeaway for me is Wolf Den’s skepticism and pushback on the prevailing wisdom. It’s good to hear that because if the prevailing wisdom can’t take a little push, it's fair to question how wise it is.

Posted by Nick Wakeman on Jan 24, 2020 at 12:44 PM


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