A lot can happen in two months as evidenced that amid global economic chaos, merger and acquisition activity in the government contractor space has been among the most active sectors.
Concerns for long-term growth amid budget wrangling is driving government defense and IT contractors to recognize that while their core market could shrink, growth can be found in areas like healthcare IT and cyber security. The likes of Lockheed Martin and General Dynamics are paving the way.
- Lockheed Martin’s acquisition of QTC, the largest provider of outsourced medical evaluation services to the U.S. government and the U.S. Department of Veterans Affairs (VA), was announced in August. QTC delivers Lockheed a highly strategic relationship with the VA while provides services that are highly complementary with Lockheed’s growth plans into new verticals and creates an IT-enabled platform in healthcare and the VA for Lockheed to leverage its government and IT expertise upon.
- General Dynamic’s purchase of Vangent, a major provider of healthcare IT systems and solutions to the federal government, military, and commercial healthcare markets, was announced in August. While not a strategically new area for GD, the acquisition significantly expands its presence in healthcare IT and highlights the growing importance of the sector for GD. Combined with the $225 million acquisition of ViPS in 2008, GD’s double-down play on government healthcare IT firmly establishes it as one of the leading players in the space.
- SAIC’s acquisition of Vitalize Consulting Solutions, a market-leading provider of clinical, business and information technology services for commercial healthcare organizations, closed in August. Already leader in the government space, SAIC seized the opportunity to expand into the commercial healthcare provider market and leverage its information and data analytics expertise, while simultaneously capitalizing on the macro trend of the convergence of commercial and Federal healthcare markets.
The Lockheed Martin and General Dynamics deals highlight the growing competition and pressure from shareholders to acquire independent “crown jewel” companies within the government contracting space crucial for driving strategic transformation and growth. These prime assets can sell at significantly higher multiples than their peers because of their scale, depth of relationships, and scarcity.
We also expect to see M&A activity driven by “golden ticket” companies, best represented by the General Dynamic’s acquisition of Network Connectivity Solutions, a DoD enterprise services and cloud computing provider. Driving the transaction for GD was access to the DoD’s $12.2 billion multibillion dollar IT systems contract. The VA announced the winners of its $12 billion IT systems contract last month – the groups left off the list of awardees is long, including General Dynamics, Lockheed Martin, IBM, Northrop Grumman, CSC, Dell, and L-3. Given the competitive dynamic and relative scarcity of multi-billion dollar contracts, we expect acquisition activity to fall among the nine independent awardees as well.
Behind the headline deals, other recent acquisitions in this space included:
Given the growing public and private investor appetite for quality businesses in the government contractor space, we expect further public company spin-outs along the lines of L-3’s divestiture of some government services operations and the ITT conglomerate breakup as profit margins shrink and corporations look to liquidate underperforming assets. We predict M&A activity to continue to be driven by strategic diversification into higher growth areas, stockpiled cash, and opportunistic action. Because we anticipate the government outsourcing market continuing to adjust through a period of significant transformation for their strategy, watch our research and deal flow for further insights and perspective. Until then, let us know what you think.