With only 15 government services and 25 defense M&A deals announced so far this year (vs 72 for the comparable period in 2012), it may seem premature to say the M&A market’s back in equilibrium.
However, it seems to be headed in that direction.
While closed deal volume so far this year is down significantly from past periods, a slow start to 2013 was somewhat anticipated given all the budget and sequestration headlines in the news and that some owners who might have otherwise sold in 2013 accelerated their exit plans given the tax law changes that became effective in 2013.
That being said, it takes a meeting of the minds between two parties for a M&A (or any other) deal to occur.
While there is always some natural gap in thinking on valuations between buyers and sellers, for most of the past five years (even late last year on the eve of potential sequestration), deals were getting done because valuation expectations were not dramatically out of sync.
Like the public industry firms’ valuations, M&A valuations for all but the select few firms have been on a slow downward trend for most of that period primarily based on reduced growth prospects from tightening budgets.
However, in early 2013, the gap became much broader as many buyers started this year either on the sidelines or smelling blood hoping valuations had adjusted downwards to the order of 25 percent from last year.
While sellers generally understood that sequestration had reduced their business visibility and growth prospects, their value expectations had not dropped nearly as much as buyers resulting in a wider gap (and fewer deals).
Even with market uncertainties still prevalent, as we approach mid-2013, convergence is slowly occurring. Most of the larger buyers are aggressively seeking deal flow (although their strict criteria and cynical attitudes remain intact).
Further, the bottom-fishers have generally starved and sellers’ expectations have generally come down. These healthy natural movements provide a basis for a resumption of deal activity—albeit at likely lower levels–in the second half of 2013 and 2014.
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).