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M&A activity may have calmed down, but conditions remain favorable

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Entering 2022, after a whirlwind of 2021 in the government services mergers and acquisitions market, there are many questions about what to expect in the year ahead.

Looking back at the first half of 2022, while some of these questions have been resolved, other key themes are emerging and impacting trading activity.

The government services M&A market was very active in 2021. Relatively cheap and readily available debt financing, a strong balance sheet, expectations of tax reform on corporate tax rates and capital gains rates, and a resurgence of M&A demand after the first, thankfully brief, pandemic pause in 2020. With the revitalization, M&A activity has led to a record-setting activity of over 180 announced deals.

M&A activity in the second half of 2021 was particularly strong with 104 announced deals alone. While expectations for 2022 have softened somewhat, overall market sentiment remains very positive, with considerable dry powder towards acquisitions and continued modest economic growth and fiscal support. supported by the expectations of

Then, in the first half of 2022, came two interrelated and, in some ways, conflicting tales of closing deals. The collective aftereffects of deal announcements considering the frenzy of the second half of 2021 are a volatile public market, another wave of COVID, rising interest rates, a conflict in Ukraine that has revived the usual war, and at the crease Faced nearly equal national threats. Comparing the first half of 2021 and the first half of 2022, deal announcements are down 25% year-over-year.

Beneath the surface, however, stats and news, industry fundamentals, M&A appetite/activity, and deal terms remain solid.

Although significantly off the pace of 2021, trading activity still trended above historical norms

By June 30, 2022, only 2020 and 2021 will exceed approximately 120 annualized transaction volumes. Although the public markets have experienced considerable volatility, the balance sheet remains strong and budgets stable, providing sufficient support for acquirers’ appetite for M&A.

As such, deal announcements are expected to accelerate in the second half of 2022, with full-year total announcements outperforming the current pace.

Geopolitical instability remains front and center

Russia’s invasion of Ukraine briefly boosted shares of defense and government stocks in early 2022, but that momentum has weakened in recent weeks despite the ongoing conflict.

Given the way the defense budget acts as a leading indicator for M&A, it will be important to track to what extent increased emphasis on the international threat landscape strengthens the focus on national security arrangements and budget support. Become.

The macro impact is positive in the background of dealmaking.

Private equity continues to play a very active role, increasing its influence on dealmaking

Private equity interest in the government services market remains very strong, as seen in transaction volumes and fundraising efforts.

Around 50% of government services deals in the first half of 2022 will include private equity (new platform and portfolio tuck-ins), and government services and aerospace/defense focused fund fundraising activity will be It further indicates bullish sentiment for the sector.

In terms of recent funding:

  • Arlington Capital Partners Filed With SEC About Intent To Raise $3.5 Billion Fund VI (April 2022)
  • Blue Delta Capital Partners Closes Fund III in December 2021 for $215M (Oversubscribed)
  • Enlightenment Capital Closes Fund IV at $540M in June 2022 (Oversubscribed)
  • Veritas Capital raised capital in May 2021 and closed the Vantage Fund at $1.8 billion (oversubscribed).

Private equity groups are also increasingly becoming “net buyers” in government services, with platform acquisitions and tuck-ins far outweighing exits. Recent aggressive rollup strategies include:

  • Arlington-backed Blue Halo has made 10+ acquisitions since 2019
  • Arlington-backed Octo has made four acquisitions since 2019, most notably the recent major acquisition of B3 Group, Inc.
  • Rollup of Carlyle’s five businesses beyond 2021 as part of the Two Six Technologies platform
  • Three Aeyon acquisitions from September 2021 to February 2022 backed by Enlightenment Capital
  • Godspeed Capital’s recently formed SilverEdge Government Solutions business consists of three acquisitions made between December 2021 and February 2022.

Regulators are taking a more aggressive stance on consolidation within federal markets

Several recent deals underscore this recent trend and highlight it as an additional consideration for both midsize and large businesses. Rocketdyne’s $4 billion-plus acquisition was finally closed in February 2022 after the Federal Trade Commission filed a lawsuit to block the deal.L3 Harris recently voiced concerns about the White House In response, we abandoned negotiations to acquire NSO Group’s surveillance technology.

In June 2022, the Justice Department filed a civil antitrust lawsuit to block Booz Allen Hamilton’s proposed takeover of EverWatch on the grounds that it would limit competition in the National Security Agency.

The Booz Allen Hamilton and Everwatch lawsuits are generally seen as more general concerns on the product side, but customer/technology overlap and a focus on the service business also need careful consideration. I am emphasizing that there is

Clearly a consideration, but not expected to be a deal breaker.

The Plight of Perceived Subscale Public Companies – Not Too Big To Be Too Small, Too Small To Be Big

Carlyle announced its intention to acquire the company in May after rumors of a possible Mantech sale began to intensify in early 2022. This represents another recent example of the involvement of financial sponsors in taking a public company private (for example, Veritas-backed Peraton acquired Perspecta, Lindsay Goldberg-backed Amentum acquired PAE). To do).

Additionally, Vectrus recently completed a merger with Vertex, creating publicly traded V2X, and other large public acquisitions over the past few years (e.g. Jacobs/KeyW, SAIC/Engility).

Trends in consolidation, scale, and financial horsepower for investments and M&A continue to motivate megadeals.

Fundamentals still matter

Despite the various factors impacting the government services M&A market, certain key fundamentals remain top priorities. Companies located in high-growth areas, built for scale, and with mature growth engines continue to attract significant interest from potential acquirers.

Combine these attributes with access to existing indefinite delivery, indefinite quantity contracts (“IDIQ”), bulk purchase agreements (“BPA”), other trade agreements (“OTA”), and task order based rewards. The combination is a powerful differentiator for sellers. When considering ongoing procurement challenges affecting government agencies and competitive tensions in crowded markets.

The first half of 2022 highlighted several qualitative and quantitative trading indicators. However, these trends underpin a trading-ripe environment, with momentum building in the second half of 2022 towards increased levels of activity to match the momentum seen in 2021.

About the Author: Brian Tunney is a director of investment bank KippsDeSanto & Co. with nearly 15 years of M&A experience. He graduated from the University of Virginia.he may reach

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