2017 Review and 2018 Outlook
Total Page:16
File Type:pdf, Size:1020Kb
2017 Review and 2018 Outlook Aerospace, Defense Technology & Government Services 2017 Review Commercial Cloud Adoption Gaining Further Traction Active M&A Participation Across the Buyer Landscape 2018 Outlook Notable Transactions Public Company Comparables & Recent M&A Transactions Representative ACP Transactions Larry A. Davis Philip J. McMann Mark Shaheen Partner Partner Managing Director (301) 231-6225 (301) 231-6202 (301) 222-8227 [email protected] [email protected] [email protected] 805 King Farm Boulevard, Suite 300 | Rockville, Maryland 20850 | P 301.231.6200 | F 301.231.7630 | aronsoncapitalpartners.com 2017 Review 2017 M&A Recap A total of 98 M&A transactions were announced in the defense technology and government services market in 2017, which was an increase in comparison to transactions completed in the prior year, but slightly lower than 2015. M&A deal count in 2017 further validated Aronson Capital Partners’ reference in the 2016 M&A Recap regarding the normalized level of deal activity that has occurred since the flurry of activity in 2015. Defense Technology & Gov't Services Historical M&A Deal Volume 105 107 Foreign 101 98 90 92 86 New PE Platform PE-Backed Private Public 2011 2012 2013 2014 2015 2016 2017 Despite normalizing to historical levels, the industry continues to ride the positive momentum brought on by President Trump’s budget proposal plans, which called for an increase in funding for a number of agencies including but not limited to the Department of Defense (9.0%+ y-o-y increase), Department of Homeland Security (7.0%+ y-o-y increase) and Veteran Affairs (6.0%+ y-o-y increase). Furthermore, the Administration pledged to make cybersecurity a major priority for both the public and private sectors, with a heavy reliance on government contractors developing innovative methods and technologies. In addition, the 2018 National Defense Authorization Act, including the Modernizing Government Technology (MGT) Act, was signed at the end of 2017 and will be a year-plus effort allowing federal agencies to reprogram unused IT budget allocation to fund future modernization projects. This is an important step forward to a next-generation (Next- Gen) federal government focused on enabling the movement to the cloud, implementing shared services and improving cyber defenses. The improved efficiencies from the MGT Act will authorize agencies to modernize their legacy IT systems, better protect data from cyber-attacks and ultimately save billions in taxpayer dollars by reducing long-term spending. Commercial Cloud Adoption Gaining Further Traction Spurred by a productive summer visit to the West Coast in August of 2017, the Defense Department’s top executives are continuing to push the implementation of cloud computing services offered by a host of vendors including Amazon (AWS), Microsoft (Azure), IBM (Watson), systems integrators and a cadre of other providers. The trip prompted the creation of the Defense Department Cloud Executive Steering Committee to speed up cloud adoption, and the group released a RFI for how the Pentagon might “acquire a modern enterprise cloud services solution” to support unclassified, secret and top secret information, more specifically as it relates to elastic computing, data management and analytics, cybersecurity and machine learning. 2017 Review The August meeting seemed to have a positive impact, as Amazon Web Services (AWS) announced the AWS Secret Region in November 2017, which will allow the Intelligence Community to execute their mission with a common set of tools, a constant flow of the latest technology and the flexibility to rapidly scale with the mission. This is a follow-on to the Top Secret Region, which was launched three years ago. The new Secret Region allows more agency collaboration, helps get critical information to decision makers faster and enables an increase in the nation’s security. In October of 2017, Microsoft announced they would expand their Azure Government Secret offering outside of the Defense Information System Agency’s cloud security requirements and offer the service to a number of agencies working on topics classified as “Secret” in fields like energy research or law enforcement. This will allow for greater access to cloud computing services like artificial intelligence and translation. Active M&A Participation Across the Buyer Landscape The positive funding environment and continued emphasis on enhancing legacy IT systems has translated into a heightened level of confidence and active participation throughout the M&A marketplace, driven mainly by (i) private equity sponsors (PEGs) acquiring platforms of scale and/or “bolting-on” niche companies with differentiated capabilities (ii) larger Tier-1 and Mid-Tier’s selectively pursuing companies with emerging, Next-Gen IT capabilities that align with mission-critical objectives (e.g., cloud, cyber, mobile, agile development, digital transformation services, artificial intelligence), and (iii) strategic buyers targeting companies that round out their technical capabilities and/or expand their client footprint into high priority end markets (e.g., Department of Defense, Department of Homeland Security, Veteran Affairs). As referenced in Aronson Capital Partners’ Mid-Year Historical Buyer Mix Review, PEGs continue to be the most active buyers in the 4% 11% 12% defense technology and government services market, 16% comprising 36% of transactions in 2017. This was 21% followed by publicly-traded companies making 20% strategically targeted acquisitions focused on 28% differentiated capabilities (e.g., cloud, cyber, mobile, agile 26% development, digital transformation services, artificial intelligence). Acquisitive buyers in 2017 included 35% 27% seasoned private equity groups such as Arlington Capital Partners, H.I.G. Capital, Enlightenment Capital, DC 2016 2017 Capital and Acorn Growth Companies. Publicly-traded Public Private PE-Backed New PE Platform Foreign companies like Accenture, CSRA, DXC Technology, Source: DACIS and ACP internal research Mercury Systems, Jacobs Engineering, Mantech Corporation and L3 Technologies also acquired companies with targeted capabilities that will enhance their overall service offerings. M&A activity from private equity sponsors, public, and privately held strategic acquirers over the past year bodes well for the industry as it signals renewed confidence in the overall growth prospects of the federal market. Outlined on the subsequent pages are the major deals of 2017 across the buyer landscape. 2017 Review Private Equity Sponsor Participation Arlington Capital Partners continues to build out its portfolio company, Polaris Alpha, acquiring Intelesys and Solidyn Solutions, Inc. in January and September of 2017. Intelesys and Solidyn offer expertise in next-gen capabilities related to cyber and C4ISR within the highly coveted Department of Defense and Intelligence Community. In addition to shaping Polaris Alpha into a full-spectrum solutions provider, Arlington Capital Partners acquired another platform company, Xebec Corporation, from seasoned private equity investor CM Equity in October of 2017. Arlington Capital Partners plans to invest additional capital into the business to support the growing demand for enterprise IT, training and role-playing subject matter expertise to special mission support programs. On the heels of H.I.G. Capital’s $283M take-private transaction of NCI, Inc., the private equity group acquired Whitney, Bradley and Brown (WBB), a leading provider of program management and consulting services to the Department of Defense and other federal agencies. This marks H.I.G.’s second relevant acquisition in under six months, solidifying their increased appetite for investments in the defense technology and government services industry. H.I.G. will work with the NCI and WBB teams to expand both portfolio companies’ capabilities through organic investments and complementary acquisitions in adjacent end markets. Enlightenment Capital has had a busy 2017, especially after the fund’s successful exit of Vistronix Intelligence & Technology Solutions in August of 2016, and subsequent closing of an oversubscribed, $147 million fund in November of 2016. Enlightenment further exemplified the fund’s commitment to the industry by announcing four new investments in a variety of technology and government service providers including managed IT services provider 1901 Group, Inc., continuous security-assurance provider Telos Corporation, strategic management consulting firm The Cadmus Group, and professional and managed services provider Cybercore Technologies. DC Capital Partners started the year with an addition to its cyber defense portfolio with the acquisition of Owl Computing Technologies. Owl Computing will combine with DC Capital’s 2016 acquisition, QRC Technologies, under Acuity Technologies Holding Company. The formation of Acuity signals DC Capital’s commitment to expanding its cyber portfolio in 2018 and beyond. DC Capital had an eventful year end as well with the acquisitions of Rocky Research and Janus Operations. Rocky Research provides customized engineering services to commercial and federal defense customers, specializing in thermal and heat management. Janus is a provider of integrated stability operations to public and private sectors worldwide, Janus was previously owned by Sterling International Group. After acquiring Telecommunication Support Services, Inc. (TSS) in July, Acorn Growth Companies continued