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Today…..

CSA NATIONAL CONFERENCE The Next Frontier in Defense and Government Services Consolidation July 21, 2004 Presented by Paul Serotkin, President ‘Investment Banking for Entrepreneurial Companies’. Today…. ‘On the way to the Frontier:’ The Historical Market in Federal M&A

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Today…..

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  1. CSA NATIONAL CONFERENCEThe Next Frontier in Defense and Government Services ConsolidationJuly 21, 2004Presented by Paul Serotkin, President‘Investment Banking for Entrepreneurial Companies’

  2. Today….. • ‘On the way to the Frontier:’ The Historical Market in Federal M&A • Technology Services Companies • M&A Deal Pricing –Federal IT Services • Creating Seller Value

  3. The Universe of Traditional Federal/Defense Technology Services Company Sellers Closely held, few shareholders, with perhaps an ESOP holding a minority position Geographically strong in one, possibly two locations (three at best) Mainly serving two, perhaps three customers at the services branch level, with diversified contract base within that customer set Broad IT services – System engineering/integration, training/simulation, network services, legacy migration, DB maintenance, logistics, modeling, application development, PM/acquisition support Usually at least five years old, many times 15+ years duration Founder often involved, at least in ownership, if not operations May have some SBSA/8a work remaining, or weaning themselves from these programs Little, if any, outside ownership, or equity investment from third parties Under $75m in revenue, many much smaller

  4. Seller Transaction Profile – Defense/Federal IT (100+ transactions since Q4 ’02) • Mostly smaller companies – 8 of 10 with revenue under $50m <$20m $100m – $250m $50m – $100m $500m + $20m - $50m $250m - $500m

  5. Buyer Transaction Profile – Defense/Federal IT (By Acquirer Size) (100+ 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

  6. Why the Active M&A Market for Federal IT • Sector Rotation – Defense in vogue today - Will it be tomorrow? • War on terrorism favors federal spending in information-centric systems (and companies that support them) • Private company M&A multiples at close to historic highs • IT outsourcing continues apace, with substantial amounts going to under $100m firms • Industry awash in capital -$2bn raised from IPO and debt offerings since 2002; internal cash flow very strong • Public companies valued on basis of 15-20% growth • Mid-tier buyers more able to compete with larger firms on price, M&A integration, benefits, workplace culture • Well-positioned firms (intel, security, C4ISR, network-centric warfare) yield M&A premium • Uncertainty in market –GWAC restructuring, small business recertification, performance-based contracts, Base closure • Private equity helps to lubricate M&A market

  7. Large Corporate Buyers Tier 1

  8. Mid-Tier Buyers – Tier 2

  9. Mid-Tier Buyers – Tier 3

  10. Mid-Tier Buyers – Tier 4

  11. Federal IT M&A Valuation – Size/Specialty Matters

  12. Contract Alignment with the Mission de Jour 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 Leading Factors in Determining Defense Company Value

  13. 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 Leading Factors in Determining Defense Company Value (cont’d)

  14. Recap • M&A Market for Federal/Defense IT Services remains robust for under $100m defense companies • M&A pricing gradation based on size, differentiators, niche defensibility • Mid-Tier companies will continue to play an active role in acquisition

  15. Minuteman Ventures LLC ‘Investment Banking for Entrepreneurial Companies’ A services firm dedicated to: • Completing successful acquisitions • Buy-and sell-side M&A support • The Federal and Defense Services Market • Working with entrepreneurs who have built successful firms • Working with Corporate CEOs who are using acquisition as a Growth Strategy

  16. Paul Serotkin President Minuteman Ventures LLC 781 750 8065 781 254 7267 mobile 703 894 1270 paulserotkin@minutemanventures.com www.minutemanventures.com

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