Why small defense and government tech companies need an M&A strategy

In business school, professors often teach that most merger and acquisition transactions fail. Evidence suggests that this is not the case in the defense and government technology industry. Large players in this sector have been prolific acquirers over much of the past two decades. In the process, these companies have built tremendous shareholder value and established market leadership. Smaller defense and government technology companies can win with M&A too. With many larger buyers currently in a strategic pause on the M&A front, now is a great time for smaller companies to embark on an M&A strategy.

Established Precedents

The top tier of Washington Technology’s Top 100 companies list is led by companies that are acquisitive. Take the example of CACI International Inc (NYSE: CACI), a significant industry player. CACI was a $100 million revenue company in 1983 but through a methodical M&A campaign and strong organic growth, it’s expecting to achieve over $7 billion in revenue in 2024. This growth has translated into the creation of over $7 billion in shareholder value. The M&A story is much the same for most of the other highest-ranking companies on this list.

On a smaller scale, a similar case study exists with Bluestone’s former portfolio company, Axim Geospatial. Through a strategy of M&A, Axim was on a trajectory to triple its revenue and profitability over a three-year period. Moreover, Axim’s M&A success opened organic growth opportunities that facilitated wins like GEO-SPI B, a 7-year, $900 million National Geospatial-Intelligence Agency contract that was the largest contract award in Axim’s history.

The scale Axim built with M&A also resulted in value creation by allowing Axim to earn a premium in its ultimate sale to NV5 Global, a publicly traded technology company.

Partner, Scale, Win

M&A is a pivotal strategy for smaller businesses aiming to open organic growth opportunities, such as winning prime contracts in full and open competition against large, established industry players. However, harnessing M&A's power requires expertise that is often less prevalent in the lower middle market.

Industry-focused private equity firms, equipped to provide upfront capital, offer proven M&A capabilities. They can identify acquisition targets and help companies implement this strategy effectively. This model significantly reduces the risks associated with a solo growth approach, enabling consistent execution.

Why Now

With the backdrop of tightening federal budgets coupled with long and unpredictable procurement cycles, M&A is a more reliable path for growth. As large strategics sit on the sidelines, there is a unique window of opportunity for smaller players to assertively engage in M&A activities.

At Bluestone, we have seen a noticeable uptick in recent M&A activity among small to mid-sized companies backed by private equity. In this evolving market, remaining inactive is not a feasible option while others take decisive action.

M&A provides a strategic avenue for small and middle-market businesses in the defense and government technology sector to achieve accelerated growth, obtain competitive market positioning and maximize value.

With the backing of private equity partners like Bluestone – where M&A is a foundational strategic principle – companies are empowered to take the tested and proven path set by some of the industry’s largest players.

As the great Yogi Berra said, “You can observe a lot by just watching.”  We have watched for a long time, and we know that M&A works. Now it’s time for smaller defense and government technology companies in the sector to join the M&A game to craft the next wave of success stories.

Zack Hester is the director of mergers and acquisition strategy and deal generation for Bluestone Investment Partners.