Today's M&A environment demands that if you want your company to be highly valued as an acquisition target, then you need to be highly differentiated.
Most mergers and acquisition advisors agree that the volume of closed M&A deals over the last five years is down from the prior decade. This can be attributed to a variety of factors, including:
- The largest integrators are focused on shedding non-core assets or consolidating assets
- A dearth of capable middle market buyers
- Continued focus on quality of assets versus the quantity of revenue/EBITDA
- A lack of good M&A targets
Despite these factors, the volume of companies that go to market is reportedly at an all-time high.
One corporate development executive at a large, acquisitive strategic company shared his observation with me. He said that of the many deals he sees, about 50 percent don’t go anywhere, another 25 percent eventually conduct an internal transaction like an ESOP or management buyout, and the final 25 percent are actually sold.
And it’s a fraction of the final 25 percent that receive the purported “strategic valuations” that is fodder for gossip.
The current increased volume of companies testing the market is usually attributable to a number of factors; an aging baby-boomer population, would-be sellers fearful of declining valuations as a result of rising interest rates, or certain M&A advisors taking a high-volume/low success rate approach to working with clients.
But good deals are getting done. And for those successful companies, this begs the question: What makes this small group of companies different from the rest?
Throwing Spaghetti Against the Wall
We all recall years ago when companies would make acquisitions to build size because bulk allowed them to compete more broadly. That doesn’t cut it anymore. Many companies found that what they thought made them different to their government customer really wasn’t that different from other competitors especially at a higher level of competition.
However, many of these companies are counseled that their true value is greater than reality. As a result, some of these companies have opted to test the M&A market with unreasonable expectations for success (valuation, structure or otherwise) and have fallen by the wayside due to a poor or indifferent response from buyers.
Special Sauce and a Plan
Acquirers look for any number of attributes when pursuing an acquisition target, including differentiated capabilities, corporate culture, past performance, a diverse contract portfolio, and the guts to compete against the biggest companies in the space and win.
Discriminating buyers insist on acquiring companies that are highly differentiated, not just a little different. These buyers demand companies that are top performers at what they do.
For example, Polaris Alpha, the Arlington Capital backed technology solutions firm has been snapping up a number of highly differentiated companies to build its capability, customer and contract base, including with its latest acquisition: Intelesys Corp.
Polaris Alpha targeted Intelesys because it was growing and winning competitive, unrestricted, full and open contracts by providing very unique, high end engineering capabilities to intelligence customers. Intelesys distinguished itself by building the expertise to compete and pursue large, highly complex and technical work. Polaris Alpha saw Intelesys, which was represented in the transaction by SC&H Capital, as a firm that could solve difficult problems and come up with innovative solutions, which fit well into the Polaris DNA and portfolio of capabilities that Arlington Capital is building.
Polaris Alpha isn’t the only recent example of a company acquiring businesses that are highly differentiated. Accenture completed two high-end cyber deals in February that include iDefense Security Intelligence Services and Endgame Inc. within days of each other. Both acquisitions bring to Accenture products, specialization and a unique set of skills that help diversify the client base.
Another acquisitive company, STG Group Inc. of Reston, Va., agreed to acquire Preferred Systems Solutions Inc. (PSS), which is a leader in providing advanced computing, analytics, cyber and software solutions to key defense, intelligence and federal civilian customers, working with more than 25 government agencies including DHS, DoD and FBI.
And most recently, KEYW restarted its M&A engine by acquiring Sotera Defense Solutions from private equity player Ares Management. This deal combines two highly-focused intelligence and defense companies with little contract or customer overlap and plenty of capability synergies.
What to expect in 2017
Intelesys, iDefense, Endgame, Sotera and PSS won’t be the last highly differentiated companies in the federal government contracting world to be acquired.
M&A activity in this space for truly differentiated companies appears to have plenty of momentum. There are too many needs within the federal government that are unmet and unfulfilled begging for innovative companies to meet those unique demands and differentiate themselves from the rest. Many of the usual systems integrator players aren’t able to fulfill those needs; they can’t develop the capabilities internally and organically so they are going to have to look externally.
This means opportunities for companies that have the guts to differentiate themselves, be extraordinary at what they do, focus on their business, serve the client, and build a strategic M&A exit roadmap. These companies will continue to rise to the top of the industry and will have better options for an M&A event when they are ready.
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