Entering 2020, momentum for government contracting mergers and acquisitions (M&As) was so strong, it was off-the-charts! Deal valuations and announcements were up in 2019, with 2020 showing no signs of slowing down. In fact, in late January/early February, three $1B deals were announced within just one week!
Then, the pandemic arrived and focus swiftly and decisively shifted from business expansion to business continuity. M&A activity came to a screeching halt.
Now, slowly, the country is starting to reopen. Government and industry are defining new ways of working together to achieve missions while keeping personnel safe. And a handful of M&A deals that were in the works before COVID-19 have pushed their way to the finish line.
What’s next? Certainly, no one expects 2020 to be the M&A boon we all anticipated just a few months ago. What does that mean for government contractors whose plans included an M&A this year? What can they be doing now to prepare for their next M&A?
To help us answer those questions, we talked to Jean Stack, managing director at Baird|Global Investment Banking. (Thank you, Jean, for sharing your perspective with us!)
1. Reset Timing and Expectations. More than some other markets, government runs on relationships. Face-to-face conversations matter. Ms. Stack does not expect that deals will close “if you haven’t already been in the room and had personal interactions.” Virtual meetings simply are not a viable substitute.
Your deal timeframe, then, will be pushed out if you aren’t past the personal vetting stage. Once we do get to whatever the new normal is, expect that the small, most strategic acquisitions will advance first.
2. Focus on Growth Sectors. Many of the sectors poised for growth before COVID-19 are still expected to do well in a post-pandemic market. Missile defense, hypersonic technologies, space intelligence, and defense R&D, for example, are still expected to grow.
In fact, “IT modernization – including cloud, cybersecurity, data analytics, and modern software development – has become an even bigger priority [since COVID-19],” points out Stack. The same is true for health IT and healthcare, including telemedicine.
3. Buyers: Consider Accelerating Existing Interests. There are great opportunities for buyers to accelerate existing interests in certain markets and companies, once the pandemic uncertainty subsides. Especially before competition heats up for those deals.
“But don’t expect a bargain,” cautions Stack. The pandemic does not change strategic priorities and underlying value, so you should still expect to pay fair prices for acquisitions.
4. Sellers: Prepare. “Be prepared,” urges Stack. “So when the window opens and the timing is right, you’re ready to go.” Now is a great time to prepare.
As with any other time, weigh the risks and benefits of going out sooner versus later. Work with your team and trusted advisors to think through the timing and approach – how to structure the process, how many buyers to talk to and even how to conduct theoutreach. Ms. Stack emphasizes that, “a cookie-cutter approach won’t work.” You’ll need a strategy that fits the realities of the GovCon market at that time.
5. Start Crafting Your Story and Key Messages. Whether you’re buying or selling, do your honest assessment of what you have to offer and what you’re looking for in an M&A partner. Start developing the key messaging points that will carry through your search. As you move through process, hone those messages to shape the essential stakeholder communications you’ll deliver before, during and after the transaction.
If you invest in the right preparation now, you’ll be well positioned to make a smart M&A deal when the time is right.