Government Contractor Market Update

GOVERNMENT CONTRACTORQuarterly Market Update Q4 2013

In This Issue

2 Government Shutdown

3 Public Company Valuation Multiples & Select Financial Metrics

4 M&A Transactions

6 Notable Contract Awards

7 Notable Contracts to Watch

8 Industry and Agency News

9 Recent Compliance News

10 FedConnects Q&A

11 Contact Information

SC&H Capital is an investment banking firm dedicated to advising the owners of middle market companies on merger and acquisition transactions, capital raises, and corporate finance projects. SC&H Capital has successfully closed 60+ transactions over the past eight years.

For the government contracting community, the third quarter of 2013 continued to be a challenging time. Contractors continued to feel the effects of the budget sequestration

that began on March 1, which was further complicated by the 15-day government shutdown that brought on waves of furloughed employees and further delays to contract awards.

This compounded uncertainty resulted in a continued decline in M&A activity for the year, but fortunately there was not a complete dearth of activity. Cisco’s acquisition of Sourcefire, and the CACI announcement that they will acquire Six3 are notable high multiple deals. Other activity included the SAIC spin-off of Leidos and acquisitions by Raytheon and Accenture.

Most contractors continue to lack visibility into how they will expand their business into the Federal government. As some companies turn to M&A for growth, it is becoming more difficult for buyers to have the confidence in a target’s ability to grow and expand. As a result, we are seeing more structured deals with earn-out components to create the shared risk scenario for the buyer and seller.

Hot areas for M&A continue to be in cyber security, ISR, health IT and big data. However, as Federal contractors recover from the shutdown, we expect that the M&A market will continue to face headwinds in many areas due to continued long-term budgetary uncertainty.

Q&A with Matt Roberson, Principal, SC&H Capital and FedConnects

FedConnects: What is the current state of the M&A marketplace right now in the government contracting community?

Roberson: The market wasn’t great earlier this year. When you compare M&A activity year to date to this time last year, 2012 was a much stronger year. That can be attributed to a number of reasons: the change in the tax code is one, continued government spending is another, and the specter of sequestration felt pretty far away last year.

Because the M&A environment was slow during the first part of the year, the buyer community’s appetite for acquisitions wasn’t really satisfied. We see that many buyers are still hungry to look at deals, so we expect that there will be an uptick in deal activity during the second half of the year and 2014 will be much stronger than 2013 overall.

See page 10 for the full Q&A discussion as posted on August 22, 2013 in the FedConnects blog by Market Connections.

Current State of the M&A Market for the Government Contracting Community

1

Impact of the Government Shutdown on Contractors

Government Contractor Quarterly Market Update Q4 2013 2

The federal fiscal year began on October 1st with a myriad of challenges driven mainly by the recent government shutdown. It has been 17 years since the last government shutdown, which lasted 26 days total. This time around, the shutdown lasted 15 days, and it is still unclear what the long-term fallout will be for the government contracting community.

The shutdown added to the uncertainty for 2013, which was compounded by sequestration and other budget cuts. Although some contractors were prepared for the shutdown, the 15 days of business closure and potential loss of revenue could have lasting consequences for many.

At the start of the shutdown, the Department of Homeland Security (DHS) issued a memo issued that stated, “As a consequence of the lapse, certain planned procurements may be cancelled and certain existing contracts may be stopped, reduced in scope, terminated or partially terminated.”

For contractors, the shutdown meant a loss of revenue, which was the case with the shutdown in 1996. “Contractors have never been reimbursed,” said Alan Chvotkin, Executive Vice President and Council at the Professional Services Council (PSC). A shutdown has been “just lost revenue, lost salary to [contractors] affected.”

Now is the ideal time for the government contracting community to assess current contracts, take the time to get better aligned with government customers, and consider securing opportunities in growth areas like cyber security, big data and health IT.

Although the government shutdown is behind us, the contractor community will still be faced with challenges due to additional sequestration cuts, which are expected to kick-in on January 15. We all still face a bumpy road ahead, but remain hopeful that the most challenging times are behind us.

One – Year Relative Performance:Over the 52-week period ending September 30, 2013, the Prime Defense Contractor index was up 36.5% while the Other Defense Contractor index was up 40.3%. Over the same period, the benchmark S&P 500 was up 16.4% while the benchmark Russell 2000 index increased 27.8%.

80.0 90.0

100.0 110.0 120.0 130.0 140.0 150.0

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2012

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1 - Year Relative Performance

S&P 500 Russell 2000 Primes Other Defense

Three – Year Relative Performance:Over the 36-month period ended September 30, 2013, the Prime Defense Contractor index gained 68.2% and the Other Defense Contractor index increased by 16.5% compared to the benchmark S&P 500 and Russell 2000 indexes that were up 47.3% and 58.9%, respectively.

60.0

80.0

100.0

120.0

140.0

160.0

180.0

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3 - Year Relative Performance

S&P 500 Russell 2000 Primes Other Defense

Source: Capital IQ

Public Company Valuations Multiples and Select Financial Metrics

3Government Contractor Quarterly Market Update Q4 2013

Large Prime Contractors($ in Millions of USD, except for per share info) Recent % off Trailing Twelve Months Forward

Stock Price 52 - Week Market Enterprise EV / EV / EV / EV /Company Ticker 9/30/2013 High Cap Value Revenue EBITDA Revenue EBITDA

The Boeing Company BA $117.50 35.3% 88,647.2$ 84,052.2$ 1.0x 10.5x 0.9x 9.9xHoneywell International Inc. HON $83.04 9.6% 65,173.4$ 67,925.4$ 1.8x 12.6x 1.7x 9.3xAccenture plc ACN $73.64 (6.1%) 46,835.0$ 41,693.9$ 1.5x 8.9x 1.4x 8.5xLockheed Martin Corporation LMT $127.55 32.1% 40,705.9$ 44,000.9$ 0.9x 7.7x 1.0x 8.0xGeneral Dynamics Corp. GD $87.52 20.4% 30,620.4$ 30,770.4$ 1.0x 8.3x 1.0x 7.3xRaytheon Co. RTN $77.07 29.9% 24,854.4$ 26,293.4$ 1.1x 7.8x 1.1x 8.3xNorthrop Grumman Corporation NOC $95.26 33.7% 21,925.5$ 22,954.5$ 0.9x 6.3x 1.0x 6.9x

Large Prime Contractors Median 1.0x 8.3x 1.0x 8.3xLarge Prime Contractors Mean 1.2x 8.9x 1.2x 8.3x

Other Defense Contractors($ in Millions of USD, except for per share info) Recent % off Trailing Twelve Months Forward

Stock Price 52 - Week Market Enterprise EV / EV / EV / EV /Company Ticker 9/30/2013 High Cap Value Revenue EBITDA Revenue EBITDA

Computer Sciences Corporation CSC $51.74 2.3% 7,641.4$ 8,435.4$ 0.6x 4.0x 0.6x 4.1xL-3 Communications Holdings Inc. LLL $94.50 15.8% 8,465.8$ 11,861.8$ 0.9x 7.6x 1.0x 8.5xHarris Corporation HRS $59.30 13.5% 6,306.0$ 7,720.0$ 1.5x 7.0x 1.5x 7.1xSAIC, Inc. SAI $64.12 363.3% 5,493.9$ 6,366.9$ 0.6x 7.7x 0.7x 7.9xAlliant Techsystems Inc. ATK $97.56 34.4% 3,124.4$ 4,298.7$ 1.0x 7.6x 1.0x 7.1xCACI International Inc. CACI $69.11 11.1% 1,607.8$ 2,144.2$ 0.6x 6.6x 0.6x 6.8xManTech International Corporation MANT $28.76 (16.6%) 1,068.6$ 1,075.1$ 0.4x 5.8x 0.5x 6.4xICF International Inc. ICFI $35.41 27.2% 700.0$ 769.5$ 0.8x 8.6x 0.8x 8.1xNCI, Inc. NCIT $5.63 (29.6%) 72.8$ 81.8$ 0.2x 4.5x 0.3x 5.7xDynamics Research Corporation DRCO $7.60 (22.1%) 78.9$ 167.1$ 0.6x 5.5x 0.6x 6.8x

Other Defense Contractors Median 0.6x 6.8x 0.6x 6.9xOther Defense Contractors Mean 0.7x 6.5x 0.8x 6.8x

6.82x

5.30x

6.63x

8.71x

6.02x

7.13x

0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

Aerospace & Defense IT Services Diversified

TEV/

EBIT

DA

9/30/2012 9/30/2013

0.82x

0.41x

0.94x

1.09x

0.48x

1.09x

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

Aerospace & Defense IT Services Diversified

TEV/

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9/30/2012 9/30/2013

Government Services Average EBITDA Multiple Samples Government Services Average Revenue Multiple Samples

Source: Capital IQNote: Data as of 9/30/12 and 9/30/13

Aerospace & Defense: NOC, LMT, GD, BA, RTN, HON, LLL IT Services: SAIC, CACI, MANT, DRCO, NCIT

Diversified: CSC, HRS, ICFI, ACN

CACI to Acquire Six3 Systems for $820 Million

On October 9, 2013, CACI International (NYSE: CACI) announced its pending acquisition of Six3 Systems, Inc. from private equity group GTCR for $820 million. Six3 Systems provides strategic solutions to U.S. Government agencies in the Intelligence, Defense, and Civilian communities in the areas of collection, processing, analysis, and security. CACI stated that this acquisition will expand its presence in the high-growth cyberspace market, will build on its high-volume C4ISR and intelligence market areas, and will give the company access to an additional $15 billion or more of potential market opportunities. This acquisition will be the largest deal in CACI’s corporate history.

Cisco Acquires Sourcefire for $2.7 Billion

Cisco (NASDAQ: CSCO), a worldwide leader in IT, announced its acquisition of Sourcefire (NASDAQ: FIRE), a developer of open source cyber security tools for global organizations and government agencies. According to Cisco, the acquisition of Sourcefire will accelerate delivery of their security strategy of defending, discovering, and remediating the most critical threats. The deal was completed on October 7, 2013. Cisco also completed the acquisition of Composite Software, a data virtualization software solutions provider, on July 30, 2013.

SAIC Completes Spin-off of Leidos Holdings, Inc.

Leidos Holdings, Inc. began official trading on the New York Stock Exchange under the ticker symbol LDOS on September 30, 2013. SAIC, now trading on the New York Stock Exchange under the ticker symbol SAIC, split its company in two, with SAIC maintaining the former company’s information technology business, and Leidos now retaining the national security, health, and engineering businesses. Leidos serves all branches of the U.S. military, agencies of the U.S. Department of Defense (DoD), the intelligence community, the U.S. Department of Homeland Security (DHS), and other U.S. Government civil agencies.

Accenture Federal Services Completes Acquisition of ASM Research

Accenture Federal Services, a wholly owned subsidiary of Accenture LLP, acquired ASM Research, a leading solutions integrator focused on using information and technology to serve federal, state, and local government organizations. Additionally, ASM Research has more than three decades of government experience and expertise in healthcare IT, information solutions and services, data analytics, cloud, data warehousing, human capital management and benefit solutions, and agile software development. According to Accenture, this acquisition helps in strategically expanding its U.S. defense business in the growing military health market. Terms of the transaction were not disclosed. The acquisition was completed on September 18, 2013.

Arlington Capital Makes Series of Acquisitions to Create Quantum Spatial

Through its portfolio company AeroMetric, Inc., Arlington Capital Partners plans to create Quantum Spatial, Inc., the largest provider of location-based tools, analytics, and data focused on the North American market. Quantum Spatial will be created through the acquisitions of GMR Aerial Surveys, Inc. (d/b/a “Photo Science”) and Watershed Sciences, Inc. (“WSI”). Photo Science is a geospatial solutions provider specializing in aerial acquisition, data collection/processing, photogrammetric mapping, mobile mapping, remote sensing, GIS, systems integration, and GPS surveying services. WSI specializes in utilizing applied airborne remote sensing data capture and analysis to develop a variety of assessment, visualization, and software solutions. The deals were announced on September 4, 2013.

Visual Analytics Acquired by Raytheon

Raytheon Company (NYSE: RTN) acquired Visual Analytics Incorporated based in Frederick, Maryland. The acquisition of Visual Analytics will add advanced analytic products and knowledge management solutions with intuitive user interfaces to Raytheon’s offerings to its customers. It will also broaden the company’s customer base in federal, state and local law enforcement. The acquisition was completed on June 27, 2013.

Notable M&A Transactions


Select Market Activity


Date Closed Target BuyersDeal Value

($ in millions)Business

Description Pending CACI International

(NYSE: CACI)Six3 Systems, Inc. 820.0 Six3 Systems, Inc. (Six3) provides strategic solutions to U.S. Government

agencies in the Intell igence, Defense, and Civil ian communities.

10/07/2013 Sourcefire (Nasdaq: FIRE)

Cisco Systems, Inc. (NasdaqGS:CSCO)

2,700.0 Sourcefire provides intell igent cyber security solutions to global large- to mid-size organizations and government agencies.

09/30/2013 Leidos Holdings, Inc. (NYSE: LDOS)

- - Leidos is a science and technology solutions provider working to address some of the world's toughest challenges in national security, health, and engineering.

09/18/2013 ASM Research, Inc. Accenture Federal Services LLC

- ASM Research, Inc. provides information technology solutions and analytical services to government clients.

09/12/2013 STEC, Inc. HGST, Inc. 321.8 STEC, Inc. designs, manufactures, and markets enterprise-class solid-state drives (SSDs), flash cards, and flash modules for use in high-performance enterprise applications.

09/10/2013 BMC Software, Inc. Bain Capital Partners, LLC and Other Investors*

8,376.8 BMC Software, Inc. develops software that provides system and service management solutions for enterprises in the United States and internationally.

09/09/2013 Mirth Corporation Quality Systems Inc. (NasdaqGS:QSII)

59.0 Mirth Corporation provides commercial and open source software and systems for health professionals in the United States and the government.

09/04/2013 GMR Aerial Surveys, Inc. and Watershed Sciences, Inc. (WSI)

Aero-Metric, Inc. - GMR Aerial Surveys, Inc., doing business as Photo Science, provides geospatial solutions for federal, civil , and private sector clients. WSI specializes in assessment, visualization, and software solutions.

09/03/2013 Geo-Marine, Inc. Versar Inc. (AMEX:VSR)

6.5 Geo-Marine, Inc. provides engineering design, construction management, environmental planning and programming, and archeological services in the United States and internationally.

08/23/2013 James Secure Solutions, Inc.

Spry Methods, Inc. - James Secure Solutions, Inc. provides cyber security, information assurance, solution engineering, and monitoring services for the Intell igence Community, DoD, and federal law enforcement agencies.

08/07/2013 Seafaring Security and Slipstream Resources

Invizeon Corporation

- Seafaring Security Services, LLC offers maritime security and surveil lance applications. Slipstream Resources, LLC offers cyber security services.

07/31/2013 Kapow Software, Inc. Kofax plc (LSE:KFX) 47.5 Kapow Software, Inc. offers Big Data integration platform products and services for managing critical data from disparate sources.

07/30/2013 Composite Software Cisco Systems, Inc. (NasdaqGS:CSCO)

180.0 Composite Software, Inc. provides data virtualization software solutions in the United States and internationally. The company serves federal government, l ife sciences, energy, and software industries.

07/15/2013 Acumen, Inc. Deltek, Inc. - Acumen Inc. provides project management solutions. Its solutions include Acumen Fuse, Acumen Risk, Acumen 360, and Acumen Cloud.

07/08/2013 Nova Research Teledyne Scientific & Imaging, LLC

- Nova Research, Inc., doing business as Nova Sensors, engages in the development, manufacture, and supply of imaging sensors and processors.

07/02/2013 Advanced Interactive Systems

Cubic Defense Applications, Inc.

3.2 Advanced Interactive Systems, Inc. provides technology-based training solutions for professionals in high-risk environments.

06/27/2013 Visual Analytics Raytheon Co. (NYSE:RTN)

- Visual Analytics, Inc. provides data analytics, decision support, and information sharing software solutions for investigating financial crimes, terrorism, border security, and fraud.

*Other Investors: Golden Gate Private Equity, Inc., Insight Venture Partners and GIC Special Investments Pte. Ltd.

Contract Awardees

*Acuity Inc., ViaTech Systems Inc., Dev Technology Group, Citizant Inc., Tangible Software Inc., BlueWater Technology Solutions Inc., Applied Computing Technolo-gies Inc., DKW Communications Inc., Global InfoTek Inc., 360 IT Integrated Solutions, SaiTech Inc., Pyramid Systems Inc., EDC Consulting, LLC.

~ Booz Allen Hamilton, CGI, CSC, DMI, DRC, GDIT, HP, IBM, KCG, Kratos, Lockheed Martin, ManTech, MicroTech, Northrop Grumman, SAIC, SRA, Technica.

+ Booz Allen Hamilton, ManTech International and Noblis.

^ Booz Allen Hamilton Engineering Services, Booz Allen, CACI Federal, Chantilly, Centurum Information Technology, Computer Sciences Corp., Glotech, Honeywell Technology Solutions, Engility, Lockheed Martin Information Systems & Global Solutions, M.C. Dean, QinetiQ North America, Services and Solutions Group, SAIC., Sotera Defense Solutions, Scientific Research Corp., and ManTech Systems Engineering Corp.

Notable Contract Awards


Contract Agency Amount

($ in millions)Prime

Contractor Award Date DescriptionEAGLE II DHS 22,000 13 Awardees

*September

2013This small business contract provides software development, IT infrastructure and maintenance.

Continuous Diagnostic and Mitigation Program

DHS 6,000 17 Awardees~

August 2013 This contract will provide the tools and services to continuously monitor federal systems and networks for cyber risks.

RDT&E Systems Engineering and

Technical Assistance (SETA) Support

DHS 236 3 Awardees+

July 2013

This contract provides Research and Development, Test, and Evaluation (RDT&E) Systems Engineering and Technical Assistance (SETA) services.

NGEN Navy 3,450 HP June 2013

The NGEN contract represents the next phase of Navy Marine Corps Intranet (NMCI) services, providing continued IT operational support and creates a path toward aligning with the DoD's JIE.

Combat Air Force Distributed Mission

Operations and Integrations Program

Air Force 490 Northrop Grumman

June 2013

This contract provides follow-on support services to the U.S. Air Force for training systems and simulators.

CDC’s Office of Public Health and

Preparedness (OPHPR)

CDC 400 Lockheed Martin

June 2013

This contract provides information technology (IT) and emergency operations planning.

SPAWARContract

Navy 900 15 Awardees^

May 2013

The contract provides equipment and services related to C5ISR, as well as information operations, enterprise information services and space capabilities.

Clean Energy IDIQ USAID 400 Engility May 2013

The contract provides equipment and services related to C5ISR, as well as information operations, enterprise information services and space capabilities.

Notable Contracts to Watch


Contract Agency Amount

($ in millions)Anticipated RFP

Release Date DescriptionSEWP V NASA 20,000 Q4 2013 This contract is anticipated to provide the good and services related to computers; high-

performance servers and databases; mass storage and network devices; advanced video and visualization solutions; computer support devices; security systems and tools; and maintenance and IT solutions.

DS TATS Army 3,000 Q4 2013 This contract will replace existing contracts that provide research and analysis on the survivability and vulnerability of military weapons, military sensing and weapon systems, including non-lethal weapons and directed energy weapons.

CSB Education Department

2,300 Q4 2013 This contract will replace an expiring contract for data management, payment processing, and customer relationship management, including call center services, and performance and program management for federal student aid programs.

Commercial Cloud Services DISA 450 Q4 2013 DISA is seeking commercial cloud services for data storage, Web and database hosting, and virtual machines that run applications.

En Route Automation Modernization

FAA 200 Q4 2013 This contract will replace existing contracts that provide research and analysis on the survivability and vulnerability of military weapons, military sensing and weapon systems, including non-lethal weapons and directed energy weapons.

OASIS GSA 60,000 Q1 2014 This contract is a one-stop shop for both commercial and non-commercial needs designed to reduce duplication of contracting efforts across the government and provide federal agencies with comprehensive, integrated professional services contract options.

TEACH Army 8,000 Q1 2014 This contract is for the acquisition of education, training, and training related services required by PEO STRI customers, including but are not limited to support of the U.S. Army, the U.S. Military Services, other federal agencies, and Foreign Material Sales (FMS).

D3I Army 4,900 Q1 2014 The D3I vehicle includes services to design, develop and integrate products focused on the development of space, missile defense, high altitude capabilities, and other requirements that enable the Warfighter to effectively support USSTRATCOM, other Combatant commands and the DoD.

TS3 Army 2,000 Q1 2014 The primary scope of TS3 will be for white- and blue-collar services as well as Research and Development (R&D) efforts.

CANES FD Navy 1,000 Q1 2014 This contract is for network equipment on ships and some shore sites.

SMORS Air Force 1,000 Q1 2014 This contract will provide maintenance support services for the agency’s missile defense and space surveillance sensors, as well sustainment and modernization of ground-based radar and optical systems, space surveillance, missile warning and missile defense.

TSA III Air Force 20,000 Q2 2014 This contract provides performance-based acquisition of training systems, covering analysis, design, development, production, installation, integration, test, database generation and sustainment.

CIO-CS NIH 10,000 Sometime FY 2014

This contract is the NIH ECS III follow-on, which will allow the government to get IT commodity solutions related to health and life sciences capabilities and other IT needs.

Industry News

Industry and Agency News


Sequestration

With FY 2014 kicking off for the federal government on October 1, the government and the contracting community are continuing to operate in a prolonged era of sequestration. As such, the “doing more with less” mentality for approaching government business has become engrained into day-to-day operations for industry and government.

Still, major Pentagon leaders are taking to Capitol Hill to share their perspectives on the draconian budget cuts. General Ray Odierno, the Army chief of staff, recently told lawmakers that the Army may not be prepared to fight a long war, if the military has to fully implement the nearly $1 trillion in proposed spending cuts over the next decade.

Senior defense leaders are also saying that problem was not only the size of the cuts, but the uncertainty of the congressional budgeting process as well as the across-the-board nature of some reductions. Without a long-term solution to the budget, agencies and contractors’ future decision-making power will continue to be handcuffed as everyone adjusts to budget “uncertainty being the new certainty”.

Cyber Security

A recent study by MeriTalk and NetApp titled, “FISMA Fallout: The State of the Union,” found that Federal cyber security professionals lack confidence in FISMA, and do not believe their agencies’ current cyber security solutions are sufficient and sustainable.

This study comes at time when agencies are facing many insider threats. In the past 12 months, agencies defended themselves against insider threats or leaks (64 percent), non-state actors (60 percent), and state-sponsored threats (48 percent).

In addition, according to the Information Sharing Environment’s 2013 annual report to Congress, nearly half the agencies handling classified data on their networks lack capabilities to thwart damaging information leaks by disgruntled insiders.

Health IT

The Health and Human Services Department’s Office of the National Coordinator is leading the initiative to help the nation’s health care providers share clinical data electronically, thereby improving patient care. Technology is becoming the underpinning for new fundamental shifts in the way that medical practices do business, as well as how patients will remain engaged and empowered in their care. Avaya and Government Executive Magazine recently issued a white paper that mapped out the top five (5) major trends in Health IT, which are the following:

1. Electronic Health Records

2. Health Information Exchanges

3. Payment Reform

4. Consumer Accountability

5. Technology Innovation

Big Data

The Government Business Council and Booz Allen Hamilton recently issued a white paper that many agencies are trying to train and/or hire a workforce to leverage Big Data. However, the current budget climate is making it difficult to hire new employees and invest in training. Only 18 percent of federal managers claim to have proficiency in manipulating and understanding large data sets.

14%

35%33%

18%

0%

10%

20%

30%

40%

No practical proficiency

Limited proficiency

Elementary proficiency

Full professional proficiency

Data Proficiency of Federal Managers

Just 18% of managers have full

proficiency with large data sets

Recent Compliance News


Bid Protests Are Slowing Down Procurements

In 2012, losing bidders deluged the Government Accountability Office with 2,475 bid protests, which was a 50 percent increase since 2008. This trend has continued into 2013 with the biggest story being the bid protest around the Navy’s NGEN contract.

The Navy awarded incumbent vendor Hewlett Packard the potential five-year, $3.5 billion contract to develop what will be the world’s largest private computer network. Three weeks after the award was announced, the losing team of Harris Corp. and Computer Sciences Corp., filed a bid protest, which could potentially delay the award by more than three months.

Frank Baitman, CIO of the Health and Human Services Department, told Federal Times that contracting throughout the federal government is broken and bid protests are one reason procurements may take up to four years. In addition, Michael Fischetti, Executive Director of the National Contract Management Association, said that sequestration is helping to fuel bid protests.

The new reality of today’s austere budget, with fewer contracting dollars being spent, is causing companies to file bid protests, particularly if the vendor is an incumbent seeking to prolong the contract.

Labor Department Pushed Federal Contractors to Hire More Veterans

The Labor Department has finalized new rules that would push federal contractors to hire more veterans and people with disabilities.

Although contractors and subcontractors have been legally required to recruit and hire veterans for more than 40 years, recent compliance would require companies to set a benchmark tied to the national veteran rate, which is approximately eight (8) percent.

By directing contractors to keep track of the number of veterans who apply for jobs and how many a company hires, these new rules also strengthen accountability and record-keeping requirements by directing contractors to keep track of the number of veterans who apply for jobs and how many a company hires.

In addition, contractors must allow the Office of Federal Contractor Compliance Programs to review documents or check for compliance when requested.

“Strengthening these regulations is an important step toward reducing barriers to real opportunities for veterans and individuals with disabilities,” Patricia A. Shiu, director of the department’s Office of Federal Contract Compliance Programs.

Background Checks Under Scrutiny After Navy Yard Shooting

The tragic Naval Yard shooting in Washington, D.C. is shining a light on concerns about individuals with government clearance, and the process for performing complete background checks.

President Obama ordered a review of security standards across government, and many lawmakers are calling for more thorough background checks for contractors.

The Office of Personnel Management (OPM), which handles background checks for federal employees and contractors, defended its screening of the Navy Yard gunman Aaron Alexis.

In light of this the recent shooting and the Edward Snowden security breach, there will most likely be a top-to-bottom overhaul of how government vets secret information and facilities.

With new pressure on agencies and contractors, it is likely that this process will be slowed down and every government-contracting employee will be more thoroughly vetted to prevent another tragedy.


Q&A: Matt Roberson, Principal, SC&H Capital, Discusses the Current State of the M&A Market for the Government Contracting Community with FedConnects, posted on

August 22, 2013

FedConnects: What is the current state of the M&A

marketplace right now in the government contracting

community?

Roberson: The market wasn’t great earlier this year. When you compare M&A activity year to date to this time last year, 2012 was a much stronger year. That can be attributed to a number of reasons: the change in the tax code is one, continued government spending is another, and the specter of sequestration felt pretty far away last year. However as we entered early 2013 and the potential for sequestration became a reality, everyone – buyers and sellers — took a ‘wait and see what happens’ approach to M&A. We can still see some of the effects of this cloudy period today.

I like to use the analogy that sequestration was like a big bank of fog, and Federal contractors were like planes flying through the fog bank. You assume that the plane will emerge from the other side on the same course that it was on when it entered the fog bank. However, there was so much budgetary and funding uncertainty during this time that buyers wanted to see how the emerging trajectory would play out. What happens when we get through this cloudy period? The options could be staying on a rising trajectory, leveling off or taking a nose-dive into the ground. So, now that we’re beginning to emerge from this fog bank of uncertainty, we are seeing both good and not so good outcomes as a result of this tumultuous time.

Because the M&A environment was slow during the first part of the year, the buyer community’s appetite for acquisitions wasn’t really satisfied. We see that many buyers are still hungry to look at deals, so we expect that there will be an uptick in deal activity during the second half of the year and 2014 will be much stronger than 2013 overall.

FedConnects: With sequestration happening, is this an

ideal time for a smaller company to seek out an acquiring

company?

Roberson: It’s no better or worse for a company that has a good future. The multiples are down from the frothiest days a couple of years ago and we still have the issue of misplaced valuation expectations, which can be a big hurdle.

If a company is doing something unique and has visibility into how they will expand their business into the Federal government, the time could be right for them to go to market. The problem is that many companies can’t say this – they feel tremendous pressure from the LPTA contracts coming out, or they are living off of short-term contract modifications because the Federal government can’t evaluate and award long term contracts as it did in the past. Without that reassurance of visibility into the funding future, it is harder for buyers to get comfortable that a contractor has the staying power, much less the opportunity for growth and expansion in the market.

FedConnects: What advice can you provide a company

who is looking to be acquired in this sector?

Roberson: I recommend that business owners honestly assess their company regarding what they bring to the market and to a prospective buyer. Owners need to surround themselves with honest advisors who will hold up the metaphorical mirror and tell them what they are and what they are not – instead of inflating the business owners expectations. We often tell companies that they are not ready to be acquired, and that they need to continue focusing on growth or building value in some way for the business owner to achieve their valuation goal. This may seem counterintuitive because we like taking companies to market, which is how we get paid. But, if it’s not right for the client, they need to hear this.

It is important for an owner to have an advisor who objectively assesses the company and helps determine their true worth to a buyer in the market.

Current State of the M&A Market for the Government Contracting Community

SC&H CAPITAL is an investment banking advisory firm to middle market businesses. We support our investment banking activity with a full suite of strategic and financial advisory resources to help companies develop and execute strategic plans and initiatives. The firm’s committed team of senior professionals average nearly 20 years of transaction advisory experience across a broad array of industries. Our holistic and customized approach to advising clients enables us to deliver unparalleled results in maximizing shareholder value and achieving strategic objectives.

• Mergers & Acquisitions• Divestitures• Management Buyouts

• Recapitalizations• ESOP• Capital Raise

• Debt Sourcing• Joint Venture• Strategic Planning

• FAR/CAS Compliance• Cost Allowability• DCAA Support

• Indirect Rate Structuring• Contract Pricing• Incurred Cost Submission

• Business System Review and Development

• Financial Modeling• Capital Structure Analysis• Forecasting/Growth

Planning

• Sensitivity & Scenario Analysis

• Working Capital Analysis• Risk Analysis

• Project Finance• Restructuring• Due Diligence• Valuations

Areas of Expertise

Transaction Advisory

Corporate Finance

Consulting

For further information on our

Government Contractor Services,

please contact:

SC&H CAPITAL

Christopher HelmrathManaging Director

[email protected]

Matthew RobersonPrincipal

[email protected]

Greg HoganSenior Vice [email protected]

Kevin O’SullivanSenior Vice President

[email protected]

Baltimore, MD(410) 403-1500

McLean, VA(703) 287-5959

www.scandh.com

This communication does not represent a solicitation of an offer to sell securities. Securities offered through Stout Causey Capital Corporation, Member FINRA/SIPC. Licensed to sell securities in Maryland, Virginia, the District of Columbia, Alabama, California, Connecticut, Illinois, Kentucky, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Tennessee, and Texas. SC&H Capital is a registered trade name of Stout Causey Capital Corporation, a subsidiary of SC&H Group, Inc. SC&H Group, Inc. is a member of SC&H Group, LLC.

Contact Information


Documents

Government Contractor Market Update