May 2005
- GSA To Merge FTS and FSS
- Military Leave and Employment Rights under USERRA Include Providing New Notice to Employees
- SBA Issues Final Rules on Service Disabled Veteran Owned Concerns
- Government Expands Programs to Crack Down on Fraud and Abuse in Government Contracts
As we look behind on the first quarter of 2005, the public equity markets have been relatively quiet in contrast to a very active merger and acquisition environment. M&A activity in the government services market reached an all time high in 2004 with a record number of transactions. We anticipate that M&A activity in 2005 will continue on its brisk pace, as strong market "drivers" remain in place to fuel this activity. Key drivers that should continue to stimulate M&A activity are:
Growing federal market
The 2006 budget submission reflects a 3% increase in spending. However, within the overall budget, IT spending is up 7%. Much of the IT spending is contracted out and will continue to sustain revenue growth for contractors in 2005. Increased IT spending is consistent with national priorities on upgrading IT infrastructure and a continued trend towards outsourcing.
Public market valuations remain at historically high levels
Current valuation levels assume growth rates of 15% to 20% which are not likely to be achieved solely through organic growth. Strategic acquisitions will be required to meet growth objectives. In addition, there is a significant valuation discount on private companies as compared to larger public companies. Current valuations for public companies in the sector are in the range of 13x to 14x EBITDA as compared to private M&A transactions which reflect valuations of 7x to 10x trailing 12 months EBITDA.
Favorable lending environment
While interest rates have continued to rise, they still remain low from an historical perspective. Furthermore, underwriting standards continue to remain favorable allowing acquirers to use significant leverage in M&A transactions.
Strong interest from private equity groups
Private equity groups have raised record levels of capital, much of which has not yet been deployed. These groups have emerged as aggressive acquirers in this market and have successfully competed with strategic buyers. A recent example of this trend is Veritas Capitals’ recent acquisitions of the DynCorp security business from CSC and its acquisition of McNeil Technologies, Inc. in 2004.
In addition to robust M&A activity, valuations continue to remain stable and at relatively high levels. In reviewing the past years M&A activity, the median enterprise value to EBITDA multiple for reported transactions was 8.4x trailing 12 months EBITDA. Within the data we see a range of 6.7x to 12x. Transactions executed at the higher end of the range typically involve larger companies or companies with a strategic focus in high priority market areas such as national security and transformational defense initiatives. We continue to see significant premiums for companies that support the intelligence community and those with highly skilled, cleared employees.
This is an exciting time for companies operating in the government services market and well positioned companies have multiple strategic options.
Upcoming Event
| Date: | Thursday, May 12, 2005 |
| Time: | 7:00 AM – Registration and Networking 8:00 - 9:30 AM – Program and Q&A |
| Location: | Hilton McLean |
| Topic: | Department of Defense's Network-Centric Vision Featuring Keynote Speaker: |
| RSVP: | |
The Department of Commerce (DOC) oversees the collection and dissemination of vast amounts of information like census and trade data, environmental and weather data, patents and trademarks that are critical to US business competitiveness. DOC relies heavily on a wide range of high tech tools to perform its job. The Department of Commerce's overall $6.5 billion budget for FY 2006 includes $1.5 billion for IT, a 6% increase over FY 2005. Procurement accounted for 27% of the DOC budget in FY 2004.
Gold Sponsors
Dickstein Shapiro Morin & Oshinsky LLP
Silver Sponsors
