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For the past five years, government contractor valuation multiples and levels of M&A activity have been at or near historic highs. For example, in the U.S. and Canada since January 1, 2004, more than 300 M&A transactions closed involving Aerospace and Defense firms along with more than 120 transactions involving Federal IT companies. More than 95% of these deals involved companies generating annual revenues of $400 million or less with an average reported transaction size of approximately $50 million.
Altogether, there are more than 10,000 U.S. government contractors generating $400 million in annual revenues or less.
While this constitutes one reason why current levels of middle market M&A activity involving U.S. government contractors are expected to continue in the near-term, certain trends that are affecting industry valuations warrant closer attention.
Valuations among I intelligence community-related and premium defense government contractors remain high. However, valuations of civilian agency government contractors and valuations of large-cap public companies have declined by 10% to 30% over the past 24 months.
The bottom line: while valuations in some sectors remain strong, some of the post-9/11 premium has been lost as public tolerance for defense and homeland security spending has wanted
With fewer mid-to-large deals available in the marketplace, acquirers face increased pressure to supplement slower organic growth through acquisitions in the government contracting sector. Other issues affecting the M&A landscape include:
| * | Such shifts in policies and regulations as the new SBS requirements mandating size-related recertification’s and tighter reviews by the Committee on Foreign Investments in the U.S. (CFIUS): |
| * | Increased bundling of Federal government contracts magnifying the importance of small businesses’ relationships with large GC players (i.e. teaming), and |
| * | Increased Federal government oversight of contract performances in the wake of several well-publicize contract abuses. |
Within this uncertain operating environment, a company must ensure that it actively positions itself over time by creating growth strategies and/or exit opportunities for itself.
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