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‘REPORT FROM THE FRONT: Federal/Defense Technology M&A – ‘Who’s Buying, Who’s Selling, and Why’ Conference: Examining the Economic Impact of SBIR and STTR March 18, 2004 Paul Serotkin. Today…. The Federal/Defense Technology Company Universe Current M&A Environment Seller/Buyer Profiles

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Today…..

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  1. ‘REPORT FROM THE FRONT:Federal/Defense Technology M&A– ‘Who’s Buying, Who’s Selling, and Why’Conference: Examining the Economic Impact of SBIR and STTRMarch 18, 2004Paul Serotkin

  2. Today….. • The Federal/Defense Technology Company Universe • Current M&A Environment • Seller/Buyer Profiles • M&A Valuation/Deal Pricing in the Federal/Defense Technology Sector

  3. Minuteman Ventures LLC • Investment Bank focused entirely on Federal/Defense Technology Sector • Work with private firm owners approaching M&A as either 1) a first time strategic growth path, or 2) a liquidity event • Founder involved with small business trade association in effecting passage of SBIR in 1982 • Work with private and public companies in transacting corporate transactions

  4. The Federal/Defense Technology Company Universe • Under $100m in revenue, often under $50m • Closely held, few shareholders, with perhaps an ESOP holding a minority position and some option-holders; typically no outside capital • Geographically strong in two, possibly three locations • Having true market presence at two to three agencies • Widely ranging services, systems and solutions across a spectrum –demarcated by degree of commoditization, classified/intel work and technology differentiation - System engineering/integration, training, modeling/simulation, network services, technology R&D, legacy migration, database maintenance, logistics, software application development, program management/acquisition support, systems/platform systems, IT/communication technology • Usually at least five years old, many times 15+ years duration • Founder often involved, at least in ownership, if not operations • Could have some SBSA/8a work remaining

  5. Government Technology Firms- Industry Stratification, By Revenue, FY02 Source: Eagle Eye Publishing/Government Services Insider

  6. Supportive Capital markets- $2bn in new issues last 18 mos.; aggregate 50% increase in’03 enterprise values Inexpensive debt capital, with attractive lending ratios Government infusing more complex technology into processes and warfare More outsourced federal functions Public sector firms valued on basis of 15-20% annual growth Good visibility into future revenue, earnings and cash flow Modernization of legacy government IT systems Steady growth in government IT budget strongest in intel/defense and homeland security LEADING TO: Robust M&A pricing; market values at/near historic highs Favorable M&A Environment for Federal/Defense Technology Firms

  7. Reasons Behind the Robust Government M&A Market Record levels of Federal/Defense Technology M&A Transactions. Why? PART FEAR FACTOR, SECTOR MATURITY, CLASSIC MAKE V. BUY DECISION • Sector Rotation – Defense in vogue today - Will it be tomorrow? • IPO ‘Buyer’ Class of ‘02 – will this potential buying class be smaller in a few years, i.e., Veridian, Titan already sold • Active mid-tier buyers ($50m-$250m); strong private equity interest (success stories – Anteon, SI, Veridian) • Well-positioned firms (intel, security, C4ISR, network-centric warfare, law enforcement, public safety) yield M&A premium • Attractive tech firms supporting homeland security and 3-letter agencies • Large platform companies diversifying into services • Uncertainty in market –GWAC restructuring, small business recertification, performance-based contracts, base closure, War on Terrorism and deficits affecting civilian agency budgets

  8. Seller Transaction Profile – Defense/Federal Technology(By Seller Size) Observations (70+ transactions since Q4 ’02) • Mostly smaller companies – 8 of 10 with revenue under $50m • Ready willingness by large cos. to buy smaller ones <$20m $100m – $250m $50m – $100m $500m + $20m - $50m $250m - $500m

  9. Buyer Transaction Profile – Defense/Federal Technology (By Acquirer Size) Observations (70+ transactions since Q4 ’02) • Major SIs very active • Smaller companies selectively transacting deals • Mid-sized buyers using M&A to add strategic pieces $100m-$250m $50m-$100m $500m+ < $50m $250m-$500m

  10. Mid-Tier Companies: Growing, Robust Acquirers • Profile: $50-$250m firms • Government is largest if only customer • Experienced organic growth and successfully integrated previous acquisitions • Need to quickly add strategic pieces • Some backed by private equity • See path to become $500m companies • Are growing or want to grow faster than government technology market • Lenders educated on government M&A, cost of debt capital still low • Promise of IPO; strategy and size both important • Immediate addition of clearances, key managers, new customers • Strong case for ‘buy v. make’ environment

  11. Tier 1 Buyers

  12. Tier II Buyers

  13. Tier III Buyers

  14. Tier IV Buyers

  15. Who’s Buying Whom SELLER: Under $20m SELLER: $20m - $50m BUYER: Under $20m $100m-$250m $20m-$50m $250m-$500m $50m-$100m $500m+

  16. Who’s Buying Whom (cont’d) SELLER: $100m-$250m SELLER: $50m-$100m SELLER: $500M+ 100% 100% BUYER: Under $20m $100M-$250m $20m-$50m $250m-$500m $50m-$100m $500m+

  17. Federal/Defense Technology M&A Valuation – Size/Specialty Matters

  18. M&A Valuation

  19. Technology Makes a Difference in Federal/Defense IT Transactions

  20. Contract Alignment with the ‘Mission de Jour’- Technology, key customers Cleared Employees Recaptured Business Prime Contract Awards Small Business Set Aside (SBSA) Awards Weak Alignment - 1Strong Alignment - 10 0-20% Employees Cleared - 120-60% Cleared 60% or Over Cleared - 10 0-20% Recompete Revenue - 120-50% Recompete 50% or Over Recompete - 10 0-20% Prime Contract Revenue - 120-70% Prime 70% or Over Prime - 10 70-100% SBSA Revenue - 130-70% SBSA 30% or Under SBSA - 10 The ‘Value Table’ – 10 Factors in Determining Federal/Defense Technology Company Value

  21. Time in Business Contract Concentration 8a Revenue Competent Management Sustained Revenue Growth 1-3 years - 14-6 years 7-10 years - 10 60%+ revenue from 1 contract - 125-60% less than 25% - 10 50-100% rev. from 8(a) - 115-50% from 8(a) Less than 15% from 8(a) - 10 Lightly regarded management - 1Highly regarded management - 10 0-7% compounded ann rev. growth - 18-15% growth 15%+ growth - 10 The ‘Value Table’ – 10 Factors in Determining Federal/Defense Company Value (cont’d)

  22. Conclusions • Federal/Defense Technology M&A Market remains robust • Buyers come from all size firms; Mid-tier firms stepping up • Technology advancement, infusion can be true pricing discriminator • M&A pricing gradation based on size, differentiators • Consolidation figures to continue for some period

  23. Contact Data Paul Serotkin President Minuteman Ventures LLC 781 750 8065 781 254 7267 mobile paulserotkin@minutemanventures.com www.minutemanventures.com

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