Why the 3 C's are so important to GovCon M&A

When it comes to mergers and acquisitions, a successful strategy in the lower middle market should focus on these “Three C’s” -- Customers, Contracts and Capabilities.

Prioritizing the three C’s leads to better outcomes in the marketplace for both buyers and sellers. Well-positioned sellers become sought after by buyers, who may themselves be preparing for their own sale.

There is an excellent business case for growing a GovCon company through M&A and benefits of a transaction include:

• Larger companies tend to receive higher exit multiples
• The scale to compete for unrestricted work
• Diversification and greater agility in the market
• Increased industry connections
• Deeper capabilities and talent pool

M&A has a long history of shaping the government contracting landscape and will continue to do so in the future. Interest in investment has skyrocketed over the last few years, led by institutional investors such as private equity firms, which is not showing signs of slowing. Also, sellers can continue to benefit post-transaction as rollover equity is popular in the current market.

Customers

Customer relationships are at the forefront of any successful government contractor, and expanding into a new customer can be difficult, but M&A can be a great way to start. Acquiring a company with skilled management and established customer relationships can accelerate new opportunities.

Acquired teams can be leveraged for quick access and insight into a customer. In addition, combined market intelligence and customer feedback can lead to refined value propositions and the ability to tailor future offerings or meet specific customer requirements. Finally, a successful M&A transaction can strengthen reputation and credibility with customers by solidifying your brand as a market leader.

Contracts

Contract vehicles are the lifeblood of the GovCon industry, and an M&A transaction often leads to acquiring additional contracts. Buyers and sellers should continuously assess existing contracts and look to leverage vehicles that align to the long-term goals and objectives of the company.

Not all contract vehicles have equal value when it comes to reaching the strategic goals of a company. When in doubt, look to the best-in-class GWACs first, for example CIO-SP4 (assuming it ever gets awarded), that will have numerous opportunities across multiple agencies for years to come.

Or, for more tailored strategies, find the contracts that are popular at specific target agencies. A diverse portfolio of contract vehicles keeps you in front of the customer, which is a value add for buyers and worth achieving for sellers.

Capabilities

Capabilities are what set companies apart and allows them to enhance their competitive position, differentiate themselves from competitors, and deliver innovative solutions. M&A enables companies to augment their offerings by acquiring specialized skills, technologies, or assets that broaden or complement their existing strengths.

Customer needs continue to evolve and acquired capabilities can often be implemented more quickly than trying to grow and deploy the capability organically. The next round of organic growth may come after a successful acquisition has brought new talent to the team.

Finally, companies may be able to quickly take advantage of synergies in the combined entities such as increased p-wins, improved margins, and more robust operations.

Conclusion

When planned correctly, both buyers and sellers benefit from acquisitions, and focusing on the “Three C’s” can help you reach your goals sooner. Hopefully, this article has helped demystify some of the complexity around M&A considerations and strategy. The government contracting landscape is a challenge to navigate, but a high-level M&A strategy doesn’t have to be.

Customers, contracts, and capabilities will continue to differentiate the government contractors best positioned for success.

Vendors should get started now to make sure they’re properly positioned for this approach to the procurement ecosystem.

Tom McBrearty is an analyst at Rock Hall Partners concentrating on mergers and acquisitions.