Industry and Thought Leaders Analyze Sequestration’s Impact on Contractors, M&A, Economy

EM-Logo_ExecutiveBizGovCon Wire along with our Executive Mosaic sister sites ExecutiveBiz and ExecutiveGov has been engaging our audience to join us in exploring the developments and trends that have shaped government contracting now more than halfway through 2013.

We’ve included excerpts from three of those authorities who provided insight into the on-going sequester’s affects on the Washington, D.C. metro economy, the GovCon mergers and acquisition landscape and the contractors themselves.

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Jim McAleese,  McAleese & AssociatesJim McAleese – Founder and Principal at McAleese & Associates

The vast majority of contractors issued their 2013 guidance with the expectation that we would have no sequester, and that we would either have a continuing resolution, (flat‑line funding from 2012), or that the Department would receive a 2013 Defense Appropriations Act, which is ultimately what occurred.

About three to four weeks into formal sequester, the “body language” of the majority of the contractors suddenly made it clear that they were no longer lobbying against sequester. The Department’s positions was still ‘sequester is triggered; this is what it’s going to mean for the mission; this is what it will mean for readiness; this is what it will mean for the services and this is what it will mean for the investment accounts’.

The focus was now on making sure that every company knew how much funded backlog it already had, that would be immune from 2013 sequester. Companies would know then how much time they had to drive costs out of the system, faster than either their sales could fall, or faster than the influx of now-smaller orders would be coming through the door.


Bob Kipps, Managing Director of KippsDeSanto & Co.kipps_bob

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.

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

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).


StephenFullerGMUDr. Stephen Fuller – Director of the George Mason University Center for Regional Analysis

The actuality of the sequester probably isn’t as significant a force in the economy as most people had expected. In fact, the cutbacks in federal spending in 2012 will be greater than the cutbacks in 2013, so we already have a sense of what it looks like and what kind of effects it has.

So, we sort’ve know what the consequence is. What we don’t know is what the offset is. Not all of the spending comes from the federal spicket. There is an increase flow in other sectors.

While there are reductions and changes going on in the economy, they get moderated by other events that to make it hard to see a specific singular episode.

It’s much more subtle. It will reshape the economy dramatically over the next 20 years, but in a way that perhaps was going to happen anyway, its now just been forced to happen a little bit sooner.

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