For the government technology services sector, the third quarter was strong and a step up fromÂ the prior yearsâ flat or shrinking activity throughout the industry, according to Bob Kipps, managing director at Tysons Corner-based aerospace and defense investment bankÂ KippsDeSanto & Co.
“Operationally, 2016 has been the year where the ‘rubber hit the road’Â for those in theÂ federal sector.”
“Across the board, the last quarter or two have been the first where the larger players have returned to organic growth after 15-20 quarters of organic contraction, ” Kipps told GovCon Wire.
Kipps spoke to GovCon WireÂ following the firm’s release of its “Fall 2016Â Aerospace /Â Defense and Government Technology Solutions MarketView” report thatÂ examines market dynamics and drivers of mergers and acquisitions in the sector.
KippsDeSanto positions the firm’sÂ quarterly MarketView reportsÂ as “Uniquely unbiased views of industry trends, valuations and M&A activity from the largest industry boutique advisor with insight into market leadersâ strategy and how theyâre executing on such to succeed.Â Not only a summary but an explanation as to the why and how.”
Median valuations among the sectorâs services and solutions companies have climbed to 10.8x in the third quarter versus a second quarter reading of 9.8x, while theÂ report singles outÂ ICFÂ (Nasdaq: ICFI) andÂ Science Applications International Corp. (NYSE: SAIC) as two of the top performers.
In addition, thirdÂ quarter deal announcements in the government technology services arenaÂ hitÂ 22 to exceed 13 in the prior year period and 59 transactions have beenÂ disclosed so far this year, roughly in line with 2014 and 2015 activity.
What Kipps called the “non-traditional buyer” has given GovCon M&A a boost this year asÂ KBRÂ (NYSE: KBR)Â bought bothÂ WyleÂ and the formerÂ HoneywellÂ (NYSE: HON) government services business forÂ almost $900 million combined, whileÂ DigitalGlobeÂ (NYSE: DGI) announced its $140 million purchaseÂ of The Radiant Group earlier in October.
KBR and DigitalGlobe are not regular participants in government services transactions and their moves to buy signal confidence in the sector’s long-term outlook and overall health, Kipps said.
“Broadly speaking, the government vertical is moving back into favor compared to other sectors of the economy. That pendulum is moving back to where outsiders are buying in again, ” he added.
The current M&A environment, Kipps said, mainly centers aroundÂ situations where a company is in a “must sell” situation like Honeywell or well-positioned firms that are poised to outperform the GovCon market’s generally slower growth trends.
“For the top quartile, it is distinctly a seller’s market but it is feast or famine. If you are in that coveted hot area like digital services, cyber, intelligence or cloud consulting, there are many suitors lined up around the corner for you, ” said Kipps.
“If you are in the middle of the pack, it’s a buyer’s market. If you’re not in that perfection situation or ‘hot lane’ area, Â it can still be a somewhat choppy market.”