The government contracting industry, like the rest of U.S economy, is trying to ascertain what political change and the financial turmoil will mean for it. Specifically, how are the capital markets and the mergers and acquisitions environment for this industry affected?
The small-business recertification rule implementedlast year by the Small Business Administration is havinga profound effect on companies that depend heavily onsmall-business set-aside contracts for growth and midtieracquirers of such companies, forcing both to focus more onorganic growth.
From a detailed review of the merger and acquisition and public capital market activity of government technology services companies for the past three years, onemust conclude that this industry has matured. It also is clear that consolidation and M&A activity will continue for the foreseeable future to be a major driver of growth and shareholder value.
A flurry of international deals involving European buyers ofU.S. defense and civilian contractors has been under waysince early 2007. Of 292 transactions by strategic buyersof U.S.-based defense companies in 2007, 50 buyerswere foreign ? 17 percent. So far in 2008, two of 17 deals involveforeign buyers.
Next year, the industry should continue to benefit from many of the positive factors from 2007, including significant liquidity available to strategic and financial buyers for acquisitions and greater competition for deals.
Merger and acquisition activity - both domestic and international - is likely to increase substantially with companies being acquired that perform international services related to nation-building.
The headlines have been dominated by talk of the "credit crunch." Many pundits are predicting that tightening in the debt markets will bring an end to the frenzied merger-and-acquisition environment, but columnist Richard Knop disagrees.
Senior executives and owners of federal IT services companies should pay close attention to a changing environment that provides both opportunities and uncertainties in 2007.
Powerful political and regulatory cross-currents could affect acquisition strategies and impinge on federal IT consolidation in the short term, but long-term prospects for continued consolidation remain strong.
Public capital markets have been receptive to federal IT companies since the Sept. 11, 2001, terrorist attacks. Since then, more than $4 billion of equity has been raised for federal companies via initial or follow-on public offerings.
In the last five years, private equity groups have discovered the federal services industry. Specifically, they're finding that it provides owners, managers and employees with an attractive alternative to a sale to a strategic buyer.
This year's pace of mergers and acquisitions has 2006 shaping up to be a continuation of the activity witnessed by government services companies in 2005.
