1, Issue 1
to Our Newsletter
Our newsletter addresses issues of
importance to leaders in the federal technology sector.
These people build companies and increase equity value.
In this issue, we deal with the myths behind selling
a firm doing business with the government, as well as
insights from business development and legal professionals
experienced in gaining an edge for your company.
Plus, a special interview with a long-time government
IT services CEO who sold his company.
For those not directly involved in this industry, you
might pass this to someone who is. Thanks. Feedback
and dialogue are welcome!
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M&A Myths For the Prospective Government Technology
Large companies won't acquire small/mid sized companies.
Not so. Large companies will indeed buy quite small
firms provided there is a tight strategic fit, one that
resonates with one of the buyer's operating groups.
Seller has to be correctly positioned, though.
Large corporate buyers in the government technology
sector reward sellers with one or more of the following
characteristics: a significant percent of employees
with secret/top secret clearances, ownership of prime
contract government wide vehicles used nationally (and
typically underutilized by the seller), funded contracts
in well-funded mission areas (special operations command,
unmanned vehicles, bio-chem, information security, C4ISR,
for example), high degree of revenue derived from prime
contracts (performed by the seller's employees), and,
though more common to mid-sized buyers - business area
diversity (see $200 million STG's purchase of DTSI in
the fall of 2002). While other attributes are valued,
the list above merits particular attention.
Myth: Mid sized buyers ($100- $300 million) make
better 'homes' for smaller company sellers than do large
One might think so, due to the fact that the mid-sized
firm is closer in size and less removed from the entrepreneurial
ways and systems of smaller firms. The truth is that
seller should probe the culture of both types of buyers.
Overly bureaucratized companies come in all sizes. Elements
of entrepreneurship can be found in the very large (note
the many modestly sized operating units at SAIC). When
contemplating the right buyer, look at control issues,
reporting systems, management performance, benefits,
and the buyer's 'communication culture.' Talk to CEOs
of other firms acquired by the buyer to see how that
firm was treated post- transaction.
Myth: The public market for government technology
firms has created a pricing bubble for smaller sellers.
Not really. While the valuation for smaller sellers,
on average, has increased some, there still exists a
fairly strong disconnect in valuation from the newly
and long- term public companies in this sector.
Why? Generally, time-honored finance theory comes into
play - the smaller company cannot command the same marketplace
presence as larger, public firms while finding it more
difficult, if not impossible, to raise equity capital.
In the government sector, in particular, smaller firms
tend to be more reliant on contracts based on size,
gender or nationality preferences. These contracts may
not be transferable to buyer, creating a valuation problem
The rebound (despite the recent fall-off) of the IPO
market for public government technology companies after
being moribund for years does have a positive impact
on sellers. The public firms are valued on the basis
of at least 20% a year growth, a challenging wall to
hurdle internally once revenue reaches into the hundreds
of millions of dollars. Combined with the growing DoD/Government
IT budgets, this argues for a continued strong stream
of closed transactions in this sector.
Myth: If I decide that M&A is the path for my
company, the only option is to sell my business.
There are ways around outright sale, especially if the
offered prices from buyers do not meet expectations.
Some smaller companies have bought yet smaller firms,
then leveraged that, in part, to become a more attractive
acquisition target years later (note the successful
Andrulis strategy). Other smaller firms agree to merge,
creating opportunities for larger market share. (See
the recent merger between SYS Technologies and AP Labs.)
Back to top
|Selected Defense/Government Technology M&A Transactions
|March 31, 2003
|March 17, 2003
|Resource Consultants, Inc.
||Innerbase Technologies, Inc.
|March 4, 2003
||Engineered Support Systems (EASI)
|March 3, 2003
||Applied Technology Solutions
|March 3, 2003
||Mantech International (MANT)
||MSM Security Services
|February 25, 2003
||Mantech International (MANT)
||Integrated Data Systems
|February 24, 2003
||The Analysis Corp. (TAC)
|February 6, 2003
||SCB Computer Technology, Inc.
||Remtech Services, Inc.
|February 5, 2003
||Perot Systems Corp.
||Soza & Company, Ltd.
|February 7, 2003
||BAE Systems North America
|February 6, 2003
||EDO Corp. (EDO)
|February 5, 2003
||Quality Research, Inc.
|February. 5, 2003
||Scientech (defense unit only)
|February 3, 2003
||SRA International (SRX)
|January 28, 2003
|January 27, 2003
||American Systems Corporation
||Business Plus Corporation
|January 21, 2003
||Computer and Hi-Tech Management
|January 10, 2003
||Information Management Consultants
Your Business Development Investment
a CEO striving to build company value, the growth of revenue
and the return-on-investment from business development
expenditures are two key factors. Are your business development
efforts paying off in a meaningful way that can be translated
to increased company value? Below is a short-hand scoring
system to develop a simplified view of the relationship
between revenue growth, business development ROI, and
Revenue Growth - What is the average annual rate
of revenue growth over the past four years for your firm?
Clearly there is no argument regarding the impact of the
negative revenue growth ratings in A and B. But what about
C? The zero for C reflects the notion that revenue growth
is just barely staying ahead of inflation. Consider that
revenue growth varies from year to year for most firms;
that may mean some year's revenue growth matches or is
less than inflation. Look at your firm's specific performance
and adjust the scoring numbers as appropriate. You may
also need to make an adjustment in scoring for D, E, or
F if your year-to-year numbers vary significantly.
Win Rate - What is your average win rate for competitive
contracts? Measure your win rate using the maximum potential
revenue value of all submitted proposals in a given time
period compared to the proposals you win. (If your firm
does not track win rate it is likely that business development
improvements are needed.) Also note that repeat business,
while extremely important, is not likely to be a good
indicator of increasing equity value.
You may measure win rate using a rolling two-year period
and measuring a) the number of proposals won divided by
the number of proposals submitted and by b) the total
contract value won (including all options and potential
modifications) divided by the total contract value submitted.
If your company captures more than 65% of the competitive
proposals submitted, it is likely that you have the capability
to expand your market position or it may be an indication
of you being too conservative. You are proposing only
on the safest opportunities.
Interpreting your combined score
-15 to 0 - Your revenue growth and business
development performance is a detriment to the value
of your firm. You should consider postponing any sale
or merger activities and determine if you can improve
your revenue growth. Consider immediate and comprehensive
actions to overhaul business development strategy and
1 to 10 - Revenue growth and new contracts
performance are unlikely to be major factors in the
valuation of your firm. Unique intellectual property
or patents may be the primary basis for determining
your firm's value. If you do not possess unique assets
you should delay sale of merger for two or three years.
Reexamine your business strategy and focus and consider
diagnostic and selected corrective actions to improve
business development capability and performance.
11 to 17 - Revenue growth and new contract
captures will be positive factors in the valuation of
your firm. Still, to optimize firm value, you should
consider diagnostic and selected corrective actions
to improve business development performance and revenue
18 to 20 - Shop for the yacht! The combination
of sharply improving revenue and impressive capture
rates is likely to command a premium value for your
firm. You have established optimum business development
performance, no corrective action recommended but management
should maintain coaching and performance enhancements.
You should work on approaches to assure a new owner
or investor of continued high levels of performance.
here for more information on Gary Dunbar, Gary A. Dunbar,
Corner - Bahar Uttam, Co-Founder/Former CEO, Synetics,
qualities were you looking for in a buyer?
BU: I placed a lot of importance on the cultural fit
offered by buyer candidates. Those who made my short
list were very people oriented, looking beyond the financials
and wanting to understand the resident talent at Synetics
and values that defined our company. Second, we wanted
a buyer that would keep the company together at least
through the transition period. Third, the ideal buyer
would have in place a program that recognized and rewarded
employee performance. Also, both the 'deal-makers' and
the operators need to display substantial integrity.
My feeling was that if these out-front company representatives
exhibited those qualities at the outset, our dealings
with the buyer post-transaction would also be positive.
What are your three best pieces of advice for selling
BU: Involve your direct reports throughout the process.
I informed my six key executives. If you have built
the right degree of trust through the years, they will
support you. These people are essential during the M&A
process and they actually increase company value once
the buyer observes their obvious talent.
Second, work with a good M&A advisor, an intermediary
who both knows the M&A practice and has long experience
in government technology markets. Build a good relationship
with the firm principals. They can take a lot of burden
off the CEO. Having said that, the CEO and intermediary
need to be interchangeable before the buyer - the negotiations
at any given time can play to the strength of one party
or the other.
Further, be able to walk away from a deal if the deal
on the table sours. And, before you even contemplate
this process, think through what you want to do after
the deal. You may end up with the buyer, or not.
How do you see the current M&A market for Government/Defense
BU: Very positively. Many buyers project a 20% growth
plan, half through organic growth, half through acquisition.
For companies under $50 million, I believe they should
always be looking at selling as one option on the table.
The difficulty of being smaller and having to grow in
an environment where large procurements dominate is
a real challenge.
Do you have any particular advice for 8(a) companies
as they contemplate sale?
BU: Yes, if more than 30-40% of company revenue is derived
under contracts set aside for 8(a) businesses, delay
the M&A process. You need to transition the contracts
to non-8(a) status or show the buyer how the contracts
will be transitioned post-transaction.
Buyers will place very little value on 8(a) contracts
unless they are transferable. One way to somewhat mitigate
this is for an 8(a)-heavy contractor to sell to another
8(a) certified firm, but even these contracts will not
get market value.
What have you been doing since the sale?
BU: I had a one-year consulting agreement with ACS to
support the transaction. I have also been playing a
lot of tennis and traveling, as well as helping other
emerging companies in their business strategies.
Your IP Jewels: Extracting Value from Company Technology
other entity matches the federal government as a source
of funds. But with government funds comes conditions.
One category of unique terms is the government's rights
in intellectual property (IP). These rights must be considered
in business plans, in attracting investors and, ultimately,
in positioning the company for maximum value when contemplating
sale of the business.
For CEOs, the IP ownership issue pertains to government
technology services firms as well as those selling products
to government customers.
Bear in mind that these rights depend, initially, on who
pays to create the IP.
Companies with privately developed IP should sell products
or services without giving the government any greater
rights than commercial customers receive. These typically
are called "commercial-item" contracts and subcontracts.
Companies that perform some research and development (R&D)
with federal funds must usually give the government extensive
rights of use, and rights to disclose to third parties,
in the resulting IP. These are government contracts in
the traditional sense, and incorporate by reference pages
of clauses from the Federal Acquisition Regulation.
There exists, of course, a middle ground. Some of my most
successful clients - defining success as having a business
plan and meeting it - first have developed a core set
of IP, and then have sought and received traditional government
contracts to develop products for specific government
needs, based on that IP. The government receives its extensive
rights in the applications - sometimes mere bells and
whistles; sometimes whole new products designed for uniquely
government uses - but the government still pays the market
price and receives the standard license for the core IP
on which the applications are based. Each time. And, it
has no contractual right to share the core IP without
your consent, which you may withhold.
Clear as mud? Trying categorizing each of your company's
divisions, programs, or other groups, first in terms of
who paid to develop useful IP:
- Privately developed all or nearly all IP;
- The government funded (or gave you) all or nearly
all IP; or
- A mixture.
Now, for each group, ask what role(s) you desire for government
revenue in your business plan:
- Big government market for commercial products and
services (i.e., no government right to share or disclose
- Focused government market for commercial products
and services (same);
- Funding for R&D only (i.e., planning no government
sales afterward); or
- Funding for R&D tied to sales of resulting products
and services to the government.
Place these two lists side-by-side and draw lines from
where each group is, in ownership of IP, to where you
want it to be, in government sales you seek.
Each line should be supported by one of the contract types
described above - the government's so- called "commercial-item"
contracts (in which it takes no unique license rights
in IP), or traditional government contracts (with extensive
government rights in IP). If not - get to the planning
room. These contracts types won't change. But where you
draw the lines can.
here for more information on Clayton S. Marsh, Esq.
Ventures does two things. We help small and mid-sized
company owners sell their businesses, and we help corporate
and private equity buyers acquire strategically aligned
We specialize in companies that sell services and products
to federal government agencies and the Department of
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© 2003 Minuteman Ventures.
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