M&A activity may have cooled but conditions are still positive

Gettyimages.com

The number of transactions won't match 2021, but the dealmaking has continued this year with some new factors emerging to drive the market.

After a whirlwind 2021 in the government services mergers and acquisitions market, we entered 2022 with a number of questions on what to expect for the year ahead.

As we reflect on the first half of 2022, some of those questions have been answered, while other key themes are emerging and impacting deal activity.

The government services M&A market was incredibly active in 2021. Relatively inexpensive and readily available debt financing, strong balance sheets, anticipation of tax reform around corporate and capital gains rates, and reinvigorated M&A appetite after the initial and thankfully short-lived 2020 pandemic pause in M&A activity led to record setting activity of more than 180 announced transactions.

Second half 2021 M&A activity was especially robust with 104 announced transactions alone. While expectations for 2022 were somewhat tempered, overall sentiment in the marketplace remained abundantly positive, buoyed by considerable dry powder for acquisitions and expectations of continued, moderate economic growth and budgetary support. 

Then came first half 2022, a tale of two interrelated, and in some respects, conflicting deal making stories.  A collective hangover in deal announcements given the fever of the second half of 2021, was met with volatile public markets, another wave of COVID, rising interest rates, conflict in Ukraine that returned conventional warfare and near peer national state threats above the fold, and a 25% year-over-year decline in deal announcements when comparing first half of 2021 to first half of 2022.

However, below the surface stats and news, industry fundamentals, M&A appetite/activity, and dealmaking conditions remain strong.

Though well off the pace of 2021, deal activity is still trending above historical norms

Through June 30, 2022, annualized deal volume of ~120 transactions would be exceeded only by 2020 and 2021 – this, despite a slower start to the year. While public markets have experienced considerable volatility, balance sheets remain strong and budgets remain stable, providing acquirers with plenty of support for their M&A appetites.

As such, deal announcements are expected to accelerate in the second half of 2022, driving full year total announcements ahead of the current pace. 

Geopolitical instability remains front and center

Russia’s invasion of Ukraine caused a brief rally in defense and government public company stock performance in early 2022, though this has tempered in recent weeks, despite the ongoing conflict.

Given the way defense budgets act as a leading indicator for M&A, it will be important to track how much a heightened emphasis on the international threat landscape will reinforce a focus on our national security posture and budget support.

The macro influences are positive for the dealmaking backdrop.

Private equity continues to play an incredibly active role with an increasing impact on dealmaking

Private equity interest in the government services marketplace remains very high – this can be seen in deal volume, as well as fundraising efforts.

Nearly 50% of government services transactions in the first half of 2022 have included private equity (new platforms and portfolio tuck-ins), while fundraising activity for government services and aerospace/defense-focused funds further demonstrates a bullish sentiment on these sectors. 

On the recent fundraising front:

  • Arlington Capital Partners submitted an SEC filing for its intent to raise a $3.5 billion Fund VI (April 2022)
  • Blue Delta Capital Partners closed its Fund III at $215 million in December 2021 (oversubscribed)
  • Enlightenment Capital closed its Fund IV at $540 million in June 2022 (oversubscribed)
  • Veritas Capital raised closed its Vantage Fund at $1.8 billion in May 2021 (oversubscribed).

Private equity groups have also increasingly been a “net buyer” in the government services arena, with platform acquisitions and tuck-ins far outpacing exits. Some recent, aggressive roll-up strategies include:

  • Arlington-backed Blue Halo has made 10+ acquisitions since 2019
  • Arlington-backed Octo has made four acquisitions since 2019, punctuated by the sizable recent acquisition of B3 Group, Inc.
  • Carlyle’s roll-up of five businesses since 2021 as part of the Two Six Technologies platform
  • Enlightenment Capital-backed Aeyon’s three acquisitions between September 2021 – February 2022
  • Godspeed Capital’s recently formed SilverEdge Government Solutions business, comprised of three acquisitions made between December 2021 – February 2022.

Regulators taking a more aggressive posture on consolidation within federal markets

Several recent deals highlight this recent trend and highlight this as an additional consideration for mid-tier and large-scale companies alike. Lockheed Martin’s planned $4B+ acquisition of Aerojet Rocketdyne was ultimately terminated in February 2022 after the Federal Trade Commission sued to block the deal, while L3Harris recently abandoned talks to acquire NSO Group’s surveillance technology following White House concerns.

In June 2022, the Department of Justice filed a civil antitrust lawsuit to block Booz Allen Hamilton’s proposed acquisition of EverWatch, on the grounds it would limit competition at the National Security Agency.

While generally viewed as a more common concern on the product side, the Booz Allen Hamilton/EverWatch lawsuit highlights the need for careful consideration of customer/technology overlap and concentration within service businesses as well. 

Clearly a consideration, but not anticipated to be a hindrance to dealmaking.

The plight of the perceived subscale public company – too big to be small and too small to be big

After rumors of a potential sale of ManTech began intensifying early in 2022, Carlyle announced its intent to acquire the company in May. This represents another recent example of financial sponsor involvement in taking a public company private (e.g., Veritas-backed Peraton acquiring Perspecta, Lindsay Goldberg-backed Amentum acquiring PAE). 

Additionally, Vectrus recently closed its merger with Vertex, creating the publicly listed V2X and furthering a trend of significant growth in median revenue among government services public companies, which has been fueled by other large public acquisitions over the past few years (e.g., Jacobs / KeyW, SAIC / Engility).

The trend of consolidation, scale, and financial horsepower for investment and M&A continues to motivate mega-deals.

Fundamentals still matter

Despite all the various factors influencing government services M&A markets, certain key fundamentals remain paramount. Companies positioned in high growth areas, being built for scale, and with mature growth engines will continue to command considerable interest from potential acquirers.

Coupling these attributes with access to existing indefinite delivery, indefinite quantity contracts (“IDIQs”), blanket purchase agreements (“BPAs”), Other Transaction Agreements (“OTAs”) and task-order based awards is a strong differentiator for sellers, especially when considering ongoing procurement challenges impacting government agencies and competitive tension in a crowded market.

The first half of 2022 has highlighted some of the more qualitative vs. quantitative deal metrics. However, these trends underpin a ripe environment for dealmaking, and a brewing momentum for heightened activity levels in the second half of 2022 that rivals the momentum we saw in 2021.


About the author: Brian Tunney is a director with the investment bank KippsDeSanto & Co. and has nearly 15 years of M&A experience. He is a graduate of the University of Virginia.  He may be reached at btunney@kippsdesanto.com.

Investment Banking products and services are offered through KippsDeSanto & Co., a non-bank subsidiary of Capital One, N.A., a wholly-owned subsidiary of Capital One Financial Corporation, and a member of FINRA and SIPC. Products and services are Not FDIC insured, Not Bank Guaranteed, May Lose Value, Not a Deposit, and Not Insured by Any Federal Government Agency. 

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.