minuteman ventures llc ‘magic of the mid-tier’: m&a as a growth strategy for mid-sized...

Minuteman Ventures LLC

‘Magic of the Mid-Tier’: M&A as a Growth Strategy for Mid-sized Federal and Defense

Technology Services Companies

September 21, 2004

Presented by Paul Serotkin

‘Investment Banking for Entrepreneurial Companies’


Today…..

• M&A Environment - Defense Technology Services

• M&A as Strategic Tool for Mid-sized Companies

• Creating and Defining Value/Deal Pricing


M&A Environment –

Defense Technology Services


Why an Active M&A Market in Federal/Defense Technology Services

• Sector Rotation – Defense in vogue today - Will it be tomorrow?• Private company M&A multiples at close to historic highs• IT outsourcing continues apace, with substantial amounts going to under $100m firms• Industry awash in capital -$2bn raised from IPO and debt offerings since 2002; internal

cash flow very strong– Cost of capital remain low

• Public companies valued on basis of 20-25% top-line growth, but government outsourcing growth under 10%

• Mid-tier buyers able to compete with larger firms on price, M&A integration, benefits, workplace culture

• Well-positioned firms (intel, security, C4ISR, network-centric warfare) yield M&A premium

• Uncertainty in market –GWAC restructuring, small business recertification, performance-based contracts, Base closure

• Private equity helps to lubricate M&A market


Seller Transaction Profile – Defense/Federal IT

• Mostly smaller companies – 8 of 10 with revenue under $50m

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Buyer Transaction Profile – Defense/Federal IT

(By Acquirer Size)

• Major SIs very active

• Smaller companies selectively transacting deals

• Mid-sized buyers using M&A to add strategic pieces

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Large Corporate Buyers Tier 1

Company Status Revenue ($ billions) Recent Mid-tier Transactions

SAIC Employee-owned 6.7 Atlantic Coast, EMA, AMA

Anteon Public 1.0 Simulation Technology, ISI

Boeing Public 50.5 Conquest

BAE Systems Public 18.2 Practical Imagineering, STI Mevatec

Perot Systems Public 1.4 ADI, Soza

Northrop Grumman Public 28 XonTech

SRA Public .5 Orion Scientific

CACI Public .9 C-CUBED, AMS

General Dynamics Public 16.6 Digital System Resources

L-3 Public 4.9 Aeromet

EDO Public .4 Adv. Eng & Research.

Raytheon Public 19.4 Solipsys

Lockheed Martin Public 31.6 Orincon

Mantech International Public .7 Integrated Data Systems


Mid-Tier Buyers – Tier 2

Company Status Revenue-’03 Recent Transactions

SI International (SINT)

Public $170m MATCOM

Wireless Facilities (WFII)

Public $260m Defense Systems, HTS

MTC Tech. (MTCT)

Public $175m Vitronics, ICI, Command

Dynamics Research (DRC)

Public $245m Impact Innovations, Andrulis, HJFord

DigitalNet (DNET)

Public $330m User Technology Associates

PEC Solutions (PECS)

Public $178m Integrated Information (IITC)



Company Status Revenue Recent Transactions

ITS Services, now Apogen Tech

Private $200m SEA

NCI Private $136m Scientific & Engineering Solutions

Sytex Private $275m MacAuley-Brown

Stanley Associates Private $190m Fuentez Systems

STG Private $170m Decision Systems Tech.

Alion Science and Technology

Private $200m Identix (Public Sector)

ICF Consulting Private $160m 2 Arthur D. Little units

RCI Private $274m Innerbase Technologies

American Systems Corp.

Private $175m True North, Business Plus Corp.



Company Status Revenue Recent Transactions

FC Business Systems Private Under $100m AmerInd

Innovation Technology Appl.

Private “ IT Specialists, DKCS

Management Systems Designers, Inc. (MSDI)

Private “ Kathpal Technologies, ClearBrook Solutions

Indus Corporation Private “ --

SFA Private “ The Analysis Corp.

Axiom Resources Private “ Keymind

CHM Private “ ECICalibre Systems Private “ Strategic Mgt. Initiatives


M&A as Strategic Tool for

Mid-sized Companies


Mid-Tier Federal/Defense Technology Services Buyers - Tier 2

• Profile: $150-$500m firms– Publicly traded, several having completed IPO in last two years

– Federal Government is largest if only customer

– Valued by capital markets on basis of top line 20-25% growth

– See path to become $1bn companies

– Typically have primary M&A role on staff

– Cash flow strong, considerable debt capacity, prospect of secondary offering


Mid-Tier Federal/Defense Technology Services Buyers - Tier 3

• Profile: $50-$150m firms– Privately held– Federal Government is largest if only customer – Experienced organic growth and may have successfully integrated

previous acquisitions– Some backed by private equity

• Serial entrepreneurs reinvesting – Lau, Paravant, BTG• PEG interest growing, new players emerging – e.g., Arlington

Capital, Paladin Capital– See path to become $100m-$1bn companies– Are growing or want to grow faster than government technology market– Deploying outside advisor to support M&A initiative– Internal: part-time use of senior executive for M&A


Who the Mid-Tier is Acquiring: the Federal/Defense Technology Services Universe

• Closely held, few shareholders, with perhaps an ESOP holding a minority position • Geographically strong in one, possibly two locations (three at best)• Mainly serving two, perhaps three customers at the services branch level, with

diversified contract base within that customer set• Broad IT services – System engineering/integration, training/ simulation, network

services, legacy migration, DB maintenance, logistics, modeling, application development, PM/acquisition support

• Usually at least five years old, many times 15+ years duration• Founder often involved, at least in ownership, if not operations• May have some SBSA/8a work remaining, or weaning themselves from these

programs• Little, if any, outside ownership, or equity investment from third parties• Under $100in revenue, often under $50m


What Mid-Tier Companies See as They Evaluate M&A as a Growth Tool

Why Buy Now

• Lot of ‘low-priced’ company inventory that could fit strategic need

• Faster way to build/expand customer relationships

• Gain new contract vehicles and brand in one or more additional market segments

• Build on existing markets • Financing available at low rates• Positions firm for greater value later • Brings other critical assets into

company – management, technical, finance, clearances

Why Hold Off

• Strategic sellers not available, due to: lack of fit, desire by sellers not to be acquired by a smaller firm, unavailability of financing, overhead structure mismatch

• M&A consolidation trend strong, gives rise to unrealistic seller pricing

• Integration challenge • Possible ‘bet-the-company’ issue• Co-manage M&A deal and ops• Not experienced in M&A• If growing, mid-tier firm will have

more financial and manpower • Take advantage of good multiples to

sell now


Acquisitions by Federal Mid-Tier Buyers Increasing

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Jan-July ’03(49 deals)

Jan-July ’04(39 deals)

% of deals by mid-tier buyers


How Mid-tier Acquirers Compete in M&A with Tier 1 Primes

• High ‘cultural’ appeal of the Mid-tier– Entrepreneurship– Ready access to the acquirer CEO, senior execs– Acquirer CEO likely to have experienced many growth company situations– Seller owners, employees retain sense of criticality in acquiring company– Benefits can be just as strong as Tier 1

• Lenders educated on government M&A, very comfortable with mid-tier– Cost of debt capital still low– Not as needed to finance internal growth, bankers eager to finance M&A

• Mid-tier companies gain immediate cleared employees, market share, customer penetration/extension, key technical/managerial personnel

• As Tier 1 firms grow, less likely to find smaller, truly strategic M&A fits, leaving more opportunity for the mid-tier

• Private equity gravitates to mid-tier firms as a platform in the federal sector• Strong case for buy v. make


Representative Mid-Tier Buyers

Company Size Range/Status Deals Approach

Stanley Associates $200m/private Fuentez Systems Long-time DoD SI, using M&A methodically to grow

CALIBRE Under $100m/private PPC (environmental unit), Strategic Management Associates

Employee-owned, founded ’89, dipping toe into M&A waters

Apogen (formerly ITS)

$200m/private SEA, Inc. Equity-backed federal IT services firm tooled for fast growth

DigitalNet $350m/public User Technology Associates

Equity-backed company, recently public, dramatic growth plans


Creating and Defining

Value/Deal Pricing


M&A Valuation – Size/Specialty Matters

Category (by revenue)

Transaction Value -Baseline

Size Premium (Relative to baseline)

Under $20m 4-5X EBITDA - - -

$20-50m 1.2x

$50-100m 1.4x

$100m 1.8x

Specialist Firms 1.8x-plus


The ‘Value Table’ – 10 Leading Factors in Determining Defense Company Value

1. Contract Alignment with the Mission de Jour

2. Cleared Employees

3. Recaptured Business

4. Prime Contract Awards

5. Small Business Set Aside (SBSA) Awards

Weak Alignment - 1Strong Alignment - 10

0-20% Employees Cleared - 120-60% Cleared60% or Over Cleared - 10

0-20% Recompete Revenue - 120-50% Recompete50% or Over Recompete - 10

0-20% Prime Contract Revenue - 120-70% Prime70% or Over Prime - 10

70-100% SBSA Revenue - 130-70% SBSA30% or Under SBSA - 10


The ‘Value Table’ – 10 Leading Factors in Determining Defense Company Value (cont’d)

6. Time in Business

7. Contract Concentration

8. 8a Revenue

9. Competent Management

10. Sustained Revenue Growth

1-3 years - 14-6 years7-10 years - 10

60%+ revenue from 1 contract - 125-60% less than 25% - 10

50-100% rev. from 8(a) - 115-50% from 8(a)Less than 15% from 8(a) - 10

Lightly regarded management - 1Highly regarded management - 10

0-7% compounded ann rev. growth - 18-15% growth15%+ growth - 10


Contact Data

Paul SerotkinPresident

Minuteman Ventures LLC781 750 8065703 894 1270

781 254 7267 [email protected]

www.minutemanventures.com

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