Volume 1, Issue 2 June 2003

Welcome 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 consultant.

Plus, advice on thinking like a buyer when contemplating sale of your company, and our round up of recent M&A deals.

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 paulserotkin@minutemanventures.com.


Paul Serotkin
Minuteman Ventures


in this issue
Think Like an Acquirer When Contemplating the Future of Your Company - We all want liquidity at some point; when it is your turn, be ready.
Recent Transactions - A quick look at Defense/Government Technology M&A Transactions in recent months.
Selecting the 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.
About Us


Minuteman President Serotkin Speaks on Defense M&A at Defense/Aerospace Investor Conference this September in San Diego
Click here for more on this SRI session.




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Think Like an Acquirer When Contemplating the Future of Your Company

Federal 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 aligned acquirers.

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 within them.

  • 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 follow-on award.
  • 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 ownership.

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Recent Transactions

Selected Defense/Government Technology M&A Transactions
Closing or Announcement
Buyer Seller Purchase
May 27, 2003 SAIC Planning Consultants, Inc. (PCI) N/D $33m  
May 15, 2003 Lockheed Martin Orincon Corp. N/D 250 employees  
May 8, 2003 ACS Excel Alternatives N/D $12m  
April 25, 2003 Sysorex Consulting, Inc. Information Systems Consortium N/D    
April 24, 2003 Anteon Information Spectrum, Inc. $90.7m $130.5m 69.5%
April 24, 2003 CACI Premier Technology Group N/D $43.4m
April 21, 2003 SAIC Predictive Systems (Security Intelligence) N/D $1.4m  
April 21, 2003 CIBER AlphaNet $8m $22m 36%
April 16, 2003 Access Systems OASAS Learning Solutions N/D $7m  
April 16, 2003 SAIC Computer Systems Technology N/D $90m  
April 10, 2003 Arlington Capital Partners ITS Services N/D $70m  

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Selecting 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. They include:

  • Regulatory Experts who advise on government rules, procedures and regulations
  • Training Professionals that run classroom- based programs to teach staff how to write persuasive proposals
  • 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 activities
  • 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 Consultant:

  • 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 market sector:

  • Proven and demonstrated capability to win government contracts
  • 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.

Click here for more information on Gary Dunbar, Gary A. Dunbar, Inc. »

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CEO Corner - Peter Schulte, Managing Partner, CM Equity Partners, New York City

Why 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 to cancellation.

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 mix.

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 sector?

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 company.

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.

For more on CM Equity Partners, click here »

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From the Trenches

John 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
  • Closing
  • 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 base.

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.

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About Us

Minuteman 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 companies.

We specialize in companies that sell services and products to federal government agencies and the Department of Defense.

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Minuteman Ventures
11 Cypress Drive
Burlington, MA 01803

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