1, Issue 2
to the Federal Growth Report.
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 highlight one of the veterans in private
equity on investing in the federal sector, and give insights
on selecting the right strategic business development
Plus, advice on thinking like a buyer when contemplating
sale of your company, and our round up of recent M&A
For those not directly involved in this industry,
you might pass this to someone who is. Thanks. Feedback
and dialogue are welcome by writing me at email@example.com.
in this issue
an Acquirer When Contemplating the Future of Your Company
- We all want liquidity at some
point; when it is your turn, be ready.
- A quick look at Defense/Government
Technology M&A Transactions in recent months.
Right Strategic Business Development Consultant -
Guest author Gary Dunbar advises on who and how to hire
for this critical role.
CEO Corner -
Peter Schulte, Managing Partner, CM Equity Partners, New
York City - CMEP is a private
equity firm that invests growth capital in the federal
IT sector, among other industries. In an interview with
the Federal Growth Report, Peter discusses his firm's
experience in the federal sector and involvement of the
private equity sector in the federal market. Since 1995,
CMEP has invested in three platform companies in this
sector - Intermetrics (which became AverStar and was sold
to Titan), Resource Consultants and ICF Consulting; the
latter two are still in the CM Equity Partners portfolio.
From the Trenches
- Active deal maker John Moore,
Mantech International CFO, spoke at the Association for
Corporate Growth M&A and Capital conference last month
in Mc Lean, Va.
Like an Acquirer When Contemplating the Future of
sector CEOs contemplating sale of their company - now
or in several years - can do themselves a big favor: Think
like a buyer!
Company CEOs can take immediate steps that will position
their company smartly before culturally and strategically
This thinking demands an honest self-assessment of
your company, yourself and your management team. Focus
on the core fundamentals that a buyer can reasonably
view as value-enhancing assets.
In the federal government sector, sellers need to
adapt their firm's strategy to the ever-changing competitive
landscape. Consider these 'pre-acquisition' action items
in planning growth and liquidity.
- Be the biggest frog in the pond, or, Diversify,
but only in a relatively few customer sets. Buyers
usually mark down in value those companies reliant
on just a few major contracts. Yet, as a smaller company,
your added value comes from an entrenched position
at a select number of customers, offering a true business
partnership that buyers respect. One Minuteman Ventures'
client performs 60% of its work for a single DoD RDT&E
lab though no single company contract constitutes
more than 20% of annual revenue.
Focus on growing entrenched positions at your
lead customers, then strive for contract diversity
- Make your customers successful, it is the best
reputation you can have, or, Enable Your Customers
to Win the 'Business Case.' The new emphasis on
'business cases' to justify OMB approval of agency
IT projects offers opportunities. By showing a track
record of helping your customers build winning business
propositions before OMB, your company reinforces its
sustaining value to current customers.
- Sell when you're on top, or, Time your
'contract cycle.' Potential sellers, particularly
those capturing contracts as a certified small business,
should consider an exit plan at the point in time
when multiple contracts are won (or expected to be
won). This gives the non-small business buyers the
confidence that they will be able to transition these
contracts to unrestricted status before the subsequent
- Make your company 'buyable,' or, Transitioning
Minority Business Contracts. How will contracts
won under the 8(a) program and Small and Disadvantaged
Business (SDB) designation continue without interruption
or limitation, yet take full advantage of the seller's
client relationship. Buyers will need to know this.
Start well in advance of a contemplated sale to
explore a 'contract-transition' strategy.
Such strategies could include moving the work
to an IDIQ contract or GWAC vehicle, or convincing
the customer that the contract should be re-competed
as full and open. Or identify other acquiring firms
in the 8 (a) program that could absorb these contracts
and continue their current status under minority
Back to top
|Selected Defense/Government Technology M&A Transactions
|May 27, 2003
||Planning Consultants, Inc. (PCI)
|May 15, 2003
|May 8, 2003
|April 25, 2003
||Sysorex Consulting, Inc.
||Information Systems Consortium
|April 24, 2003
||Information Spectrum, Inc.
|April 24, 2003
||Premier Technology Group
|April 21, 2003
||Predictive Systems (Security Intelligence)
|April 21, 2003
|April 16, 2003
||OASAS Learning Solutions
|April 16, 2003
||Computer Systems Technology
|April 10, 2003
||Arlington Capital Partners
the Right Strategic Business Development Consultant
CEOs who operate in the federal sector have many options
for maximizing their business development functions. Almost
always, one option is to augment internal personnel with
business development consultants. Those who can help you
win new business come in a wide variety of types and sizes,
each with their own set of strengths and limitations.
- Regulatory Experts who advise on government
rules, procedures and regulations
- Training Professionals that run classroom-
based programs to teach staff how to write persuasive
- Proposal Writers that take rough drafts and
turn then into effective proposal text
- "Door Openers" who have connections that
facilitate identifying and getting into the offices
of key leaders and decision makers
- Lobbyists who track and influence congressional
- Strategic Business Development Consultants
are advisors who help plan and execute successful
business development initiatives.
Selecting the right type and the right firm or consultant
requires you to clearly understand your own goals and
objectives. Specifically, what do you want to achieve
by bringing this consultant or firm into your company's
business development operations?
If addressing one of the situations or objectives
listed below, consider the Strategic Business Development
- You want to improve your business development performance
- You are entering the government market or a new
sector in the government market
- You are working to capture a key strategic contract
- You are evolving into a larger business from your
initial phase as an 8(a) or small business.
I believe there are four principal criteria when selecting
a Strategic Business Development Consultant in the government
- Proven and demonstrated capability to win government
- Proven and demonstrated capability to achieve consistent,
long-term revenue growth
- Ability to pass on to others the "know-how" of revenue
growth strategy and winning contracts
- Quantitative and measurable results in growth of
contract portfolio, growth of revenue, increase in
the win rate of competitive contracts, and winning
key strategic new competitive contracts.
Business development consultants who have previously
led successful companies or operations are the most
likely source of people with the capability to achieve
consistent, long-term revenue growth. These include
former CEOs and corporate officers responsible for major
business units or operations.
While important to the process, experts in government
regulations, the FARs or DFARs, market niches, or proposal
production will not provide knowledge and experience
derived from actual hands-on experience in achieving
significant revenue growth.
The most important credential to examine is the revenue
growth record of the companies led by your potential
business development consultant. If he or she has not
achieved significant revenue growth while leading a
previous company as President or CEO (or Senior VP,
Business Development), there is little reason to believe
this consultant will help your company grow. On the
other hand, if your candidate has achieved significant
revenue growth in leading one or more companies, there
exists solid evidence that he or she may help you.
Also, your business development consultant must have
the capability to distill his or her successes into
learnable knowledge and principles that can be applied
within your firm, The best way to judge this capability
is to invite the potential consultant to present his
or her approach to your firm. That presentation will
give you the opportunity and information to judge his
or her ability to communicate clearly, collaborate with
your staff and work effectively in your market sectors.
Finally, test yourself.
- Is your firm consistently growing revenue at a significant
rate over the long-term?
- Is your firm winning 50% or more of the competitive
proposals (by value) submitted?
- Is your firm winning more than 65% of the competitive
proposals submitted and not exploring new markets?
- Is repeat business or task order (IDIQ) work a strong
base of your annual revenue?
If you answer 'no' on two or more of these, you should
develop and implement a strategy to improve your business
develop effectiveness. Retaining a strategic business
development consultant can help you focus your efforts
and upgrade your capability.
here for more information on Gary Dunbar, Gary A. Dunbar,
Corner - Peter Schulte, Managing Partner, CM Equity Partners,
New York City
have private equity groups (PEGs) actively invested in
the federal IT sector in the past several years?
PS: PEGs had to overcome perceptions about the federal
sector that kept many from investing. The government
market comes with its own set of peculiarities, such
as a different procurement process unique to federal
agencies, different accounting and revenue issues and
the possibility of legislative and budget impacts on
revenue stability. There has been a perception that
investment in this sector was the domain only of people
inside the Beltway, that 'government veterans' were
willing only to work with only former government veterans.
While most PEGs still will not consider federal investments,
those of us who have invested in this sector have come
to understand the inherent value inside this type of
firm. When Anteon successfully went public (the culmination
of a successful PEG investment), PEG investors took
particular note of this sector.
While it varies by company, generally these firms
are stable businesses. Especially in a slower economy,
properly managed federal services firms have growth
dynamics that offer very reasonable returns for PEGs
that are not subject to the risks of some commercial
ventures. There are other risks, but it is possible
to become familiar with these and understand how to
differentiate among companies. Like any sector that
attracts PEG capital, this is a segmented industry that
lends itself to add-on acquisitions to the original
platform investments. Given a particular company's stability
and that of the industry, this can give PEGs a predictable
result within a range of returns.
What types of companies does CM Equity Partners
seek for investment in this sector?
PS: We value companies that have a distributed contract
base, those not overly-concentrated in one agency and
one contract. We also like firms that have good visibility
into future revenues and profit.
Since the founder/owner(s) and/or senior management
tend to stay in a PEG portfolio company, we look for
leaders with experience in this industry, willing to
hold an equity stake in the company going forward. They
need to be able to demonstrate that their firm can achieve
the growth that they project.
With respect to the market, we seek firms mainly in
program management, infrastructure and other outsourced
technology services, which are segments that tend to
have recurring revenue opportunities and are less subject
Specifically, our criteria for platform investments
include companies in the $30 to $100 million revenue
range, with operating margins between 4% and 8%. We
are neutral as to agency or as to the Civil agency/Defense
While we prefer the higher margins that T&M contracts
typically bring, we also value those companies that
have cost-plus contracts. They provide good overhead
cost absorption, albeit at lower margins, and, if the
acquisition is fairly priced, can generate the same
types of returns for the PEG and the management shareholder
group as the higher margin, more profitable companies.
What makes a successful PEG investment in the federal
PS: Several factors need to be in place or put in
place for success:
- Widespread distribution of equity among managers
(CM Equity Partners targets 30 or more managers to
become option or stock holders)
- Sense of partnership between retained management
and the PEG investors
- An honest assessment and representation of the overhead
included in the indirect rate structure. If the company
has underinvested in infrastructure and business development
and must restructure its indirect rates to sustain
or propel growth, this gives us pause on pricing and
we question our confidence in the earnings of the
What have been your firm's successes in the federal
sector to date?
PS: We are pleased with our performance in this sector.
In our first deal, we executed a public-to-private transaction,
the acquisition of Intermetrics in 1995, when the company
was at the $52 million level. Through internal and external
growth, we grew to $200 million at the time of the sale
of the company, then called AverStar, to the Titan Corporation
in June, 2000.
The other two transactions we closed were via purchases
of operating units from public companies. In 1998, we
acquired Resource Consultants, Inc. when it had revenues
of approximately $60 million and had posted several
years of declining revenues. The company now is running
at $275 million. ICF Consulting was approximately a
$100 million unit when we acquired it in 1999. The company
projects $165 million in revenue this year.
On the whole we continue to believe this is a good
area for investment.
more on CM Equity Partners, click here »
Moore, Executive Vice President, CFO and Treasurer of
Mantech International (NASD:MANT) spoke recently at the
Association for Corporate Growth (ACG) National Chapter's
'M&A and Capital Forum' in McLean, Va. Minuteman Ventures'
President Paul Serotkin was there. (See www.acg.org.)
Following is a summary:
An active buyer over many years in the federal technology
sector, Mantech has accelerated its acquisition pace
since going public last year.
The company follows an 11-step process that helps
to add order and certainty to a highly dynamic process.
The steps unfold from conceptual planning through closing
and maximizing/integrating the acquired company.
- Acquisition strategy
- Deal flow
- Deal communications
- Candidate sorting
- Managing the acquired company
- Target approach
- Target integration
- Valuation range
- (Combined) new organization
- Due diligence
When positioning themselves before potential buyers,
CEOs seeking exit should heed John's words on deal rationale.
First, Mantech doesn't 'buy sales.' Strategic fit
drives interest. (Ed. note - Before the IPO binge
in the federal sector over the last few years, more
companies were acquiring for bulk - the addition of
sales without as tight a strategic fit.)
Companies that make Mantech's short list must bring
something 'New' - whether it is new customers, new contracts
base, new intellectual property or new people skills
Further, as a public company, the deal must be accretive
to Mantech's earnings. In other words, the earnings
per share (EPS) reported by Mantech in quarters after
the transaction must be no worse -and preferably improved,
once the effect of the seller's financials and the accounting
for the consideration (e.g. Mantech shares or cash)
is factored in.
Mantech sees many candidate sellers, some generated
from their internal research, others brought to them
by investment bankers and M&A advisors. The challenges
Moore sees (below) in the candidate sorting process
are common to others in the federal sector and elsewhere.
You want what? Some sellers have unrealistic
expectations as to price for their business. An educated
seller as to market value makes the process that much
smoother - and more likely to lead to a successful conclusion.
Home-friendly? Once part of Mantech, the selling
entity must have a 'reporting home,' a place within
Mantech that would logically accommodate the seller's
business operations. A stellar candidate loses points
if the fit within Mantech does not work.
Numbers rule, or do they? Yes, the seller's
financial profile must impress Mantech and hold up once
deal considerations and post-transaction effects are
put into place. But stressing profit optimization to
the exclusion of investment in important infrastructure
and personnel development issues may make an attractive
candidate appear less so.
Leaders of the pack wanted! Good companies
at the point of acquisition are better poised to grow
when their continuing managers (be they the current
senior executives or others who continue with the seller)
know how to lead and manage. Even in a new environment,
Mantech, as others, want solid managers capable of sustaining
the seller's growth.
Tire kicker, heal thyself. Moore knows how
tempting it is to review many of the M&A opportunities.
But it is incumbent on buyers such as Mantech to screen
adequately before even taking the review process to
the next level on a given candidate.
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
11 Cypress Drive
Burlington, MA 01803
© 2003 Minuteman Ventures.
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