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Bob Kipps: Early 2013 GovCon M&A in “Eye of the Storm”

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No question, the Defense and Intelligence budgets will likely remain under pressure for the forseeable future. But keep five things in mind regarding the GovCon M&A market:                                                                         1) even after a decade of consolidation, the market remains highly fragmented at the middle and lower tiers,
                                                              2) the US continues to face serious (and potentially growing) National Security threats,
                                                                 3) even after potential cuts, the US Government market is huge with room to grow for the best-positioned firms,
                                                               4) the market’s evolving–budget funds are being spent in different areas and on different solutions than in the past,
                                                              5) most GovCon deals have been successful for the buyers and M&A remains the tool of choice for cash-rich buyers interested in expeditious strategic repositioning (as required by today’s market).                                                                                                            So we see the current pause as temporary in nature. So fasten your seat belts, presuming we can soon get past today’s budget battles and fears, the second half of 2013 and beyond should see plenty of deals.

Eye of the GovCon M&A Storm

Bob Kipps, Managing Director, KippsDeSanto & Company

After gushing throughout 2012, GovCon M&A deal announcements have slowed to a trickle thus far in 2013.  At a recent deal conference in DC last week, lenders and other transaction advisors were commenting about their lack of deal flow.

Sellers clearly tried to accelerate deals that might have otherwise closed in early 2013, before year-end.

After a blistering number of deals at the end of 2012—55 Defense and Government Services deals were announced in the 4th quarter of 2012 alone—there’s only been 16 deals closed so far in 2013 through February.

With seemingly an intensification of the budget/sequester, cost and contracting concerns which have dominated the headlines over the past couple years plaguing many industry firms’ business visibility and financial performance, this slowdown is not unanticipated.

But has the music stopped for good?  Far from it!

On the buyside, while their diligence is heightened around sequester and budget cut threats, those companies committed to this market for the longer-term continue to have a strong appetite for acquisitions of firms with depth in Health, Collaboration and Cloud Computing, Data Analytics, Cybersecurity, SOF, C4ISR and select areas of Intel that are deemed growth areas or less susceptible to areas facing budget pressure.

In our business, while we have found some buyers choosing to ride out the headline risks on the sidelines, 9 out of 10 buyers say they are “open for [deal] business” and otherwise excited to see our clients coming to market.

On the other side of the deal, while future sellers are likely to pay higher taxes on their deal proceeds, most of the real reasons owners consider a sale—like strong valuations/demand for their business (primarily in the above areas), owner interest in retirement and/or distaste for the current business environment, shareholder differences or ownership rebalancing, and increasingly market/business fear–remain and/or have intensified.

That being said, many potential sellers feeling overly susceptible to budget cuts are rightly staying on the sidelines for now.  The select, firms possessing solid books of business and focus in the areas of strong buyer demand are exploring the market without delay and benefiting, in some cases, from the market’s current supply/demand imbalance!    

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logo (1)Bob Kipps has more than 20 years of experience providing transaction advisory and financial consulting services to defense and technology firms. Prior to founding KippsDeSanto, he served as a managing director in Houlihan Lokey’s Washington office and helped lead the firm’s Aerospace∙Defense∙Government industry investment banking group.

Named the 2007 Dealmaker of the Year – Investment Banker by the Association for Corporate Growth’s National Capital Chapter, Kipps has also held executive posts with Peterson Consulting and Tucker Alan, advising aerospace and defense, engineering, construction and IT companies.

Kipps graduated from the University of Virginia with distinction as a bachelor of science in commerce. He is registered with FINRA as a General Securities Registered Representative and Principal (Series 7, 63, 24, and 79).

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