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In This Issue
1 Appetite for Acquisitions Continues
2 Public Company Valuation Multiples & Select Financial Metrics
3 M&A Transactions
4 Select Market
Activity
5 Industry and
Agency News
6 Representative
Transactions
7 Contact Information
GOVERNMENT CONTRACTOR QUARTERLY MARKET UPDATE Q2 | 2016
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
100+ transactions with
industry-leading growth companies.
As we rapidly approach the end of 1H 2016, there will be a modest rise in M&A deal volume, given buyers’ increasing desire to add scale and make portfolio-enhancing acquisitions – much like the government contracting arena experienced in 2015.
Similar to 2015, ongoing budgetary challenges remain along with the associated shift toward LPTA awards and cost-plus contracts. This environment serves as a continuing catalyst for M&A activity as companies seek more efficient cost structures.
As a result, a series of headline-grabbing megamergers have been announced, wherein buyers were able to add considerable scale and realize M&A-related cost synergies. For
example, Leidos announced its $5 billion merger with Lockheed Martin’s IT Business, and IBM agreed to acquire Truven Health Analytics for $2.6 billion. Additionally, many small businesses and middle-market companies continue to expand through mergers of equals.
Also similar to 2015, buyers remain focused on – and willing to pay premium valuations for – cyber, data analytics, special operations, intelligence, and healthcare IT. As budgets for these areas are expected to again increase, we expect to continue to see heavy follow-on deal activity.
SC&H Capital anticipates that the high volume of M&A activity, along with enhanced valuations, will provide profitable opportunities for shareholders exploring liquidity options.
Strong Appetite for M&A Activity Continues In 2016
1
One – Year Relative Performance:Over the 52-week period ending March 31, 2016, the Large Prime Defense Contractor index was up 7.4% while the Other Defense Contractor index rose 0.5%. Over the same period, the benchmark S&P 500 was down 0.4% and the benchmark Rus-sell 2000 index fell by 11.1%.
Three – Year Relative Performance:Over the 36-month period ending March 31, 2016, the Large Prime Defense Contractor index gained 95.3% and the Other Defense Contractor index increased by 44.3% compared to the benchmark S&P 500 and Russell 2000 indexes which had gained 31.9% and 18.7%, respectively.
Source: Capital IQ
75.0 80.0 85.0 90.0 95.0
100.0 105.0 110.0
Inde
xed
at 3
/31/
2015
Clo
se
1 - Year Relative Performance
S&P 500 Russell 2000Large Primes Other Defense Contractors
90.0
110.0
130.0
150.0
170.0
190.0
210.0
Inde
xed
at 3
/31/
2013
Clo
se
3 - Year Relative Performance
S&P 500 Russell 2000Large Primes Other Defense Contractors
Large Prime Contractors
Other Defense Contractors
Government Services Average EBITDA Multiple Samples Government Services Average Revenue Multiple Samples
Source: Capital IQ
PUBLIC COMPANY VALUATIONS MULTIPLES AND SELECT FINANCIAL METRICS
Note: Data as of 3/31/15 and 3/31/16Aerospace & Defense: NOC, LMT, GD, BA, RTN, HON, LLL
IT Services: LDOS, CACI, MANT, EGL, NCIT | Diversified: CSC, HRS, ICFI, ACN
2 | Government Contractor | Quarterly Market Update | Q2 2016
DLH HOLDINGS ACQUIRES DANYA INTERNATIONAL
DLH Holdings announced its acquisition of Silver Spring-based Danya International for $39 million in an example of how small and mid-tier contractors remain active in the marketplace.
The acquisition of Danya will enable DLH, a publicly-traded company, to bid larger federal health IT opportunities and expand its capabilities with its key federal customers including HHS, the CDC, and the VA.
JACOBS ENGINEERING GROUP ACQUIRES VAN DYKE TECHNOLOGY GROUP
In April, Jacobs Engineering Group acquired Van Dyke Technology Group, a Maryland-based cybersecurity contractor serving the U.S. Intelligence Community.
With approximately 180 employees, Van Dyke provides high-level cybersecurity services, with particular strength in identity and access management (IAM) and threat mitigation.The acquisition will complement Jacobs’ current cybersecurity capabilities and enhance its offering among its current customers in the Defense Department and the Intelligence Community.
LEIDOS TO BUY LOCKHEED IT BUSINESS FOR $5 BILLION
In January, Leidos announced that it is buying the IT business of Lockheed Martin in a deal worth $5 billion.
As part of the deal, Lockheed Martin is taking a $3.2 billion stake in Leidos and will be entitled to add three directors to the Leidos board. Leidos also will pay $1.8 billion to Lockheed.
With the addition, Leidos will have a $10 billion portfolio of mission IT solutions and technical services, which will make the company the largest IT provider to the federal government.
SIRIUS COMPUTER SOLUTIONS ACQUIRES FORCE 3
Sirius Computer Solutions has acquired Force 3 in a move that expands Sirius’ security and networking solution offerings in the mid-Atlantic region and federal marketplace.
Force 3 has several hundred clients, approximately 170 employees, and an estimated $260 million in revenue, with headquarters in Crofton, Maryland and an office in the Washington, D.C. area.
The two companies together will provide next-generation network security technology, Force 3 reported in a press release. Force 3 will operate as a wholly-owned subsidiary and keep its name.
MERCURY SYSTEMS TO ACQUIRE MICROSEMI CORPORATION BUSINESS UNIT FOR $300 MILLION
In March, Mercury Systems signed a definitive agreement with Microsemi Corporation to acquire the embedded security, RF and microwave, and custom microelectronics businesses of Microsemi for $300 million in cash.
The deal is expected to close during Microsemi’s third fiscal quarter of 2016, ending July 3.
If approved by regulators, Mercury claimed the deal would make it the largest commercial vendor of embedded secure processing gear for the military.
IBM BUYING TRUVEN FOR $2.6 BILLION
IBM has agreed to acquire Truven Health Analytics for $2.6 billion, its fourth acquisition in less than a year aimed at expanding in the business of combing through health-related data.
More than 8,500 hospitals, insurers, and government agencies use Truven to manage and analyze data generated by the healthcare industry. Veritas Capital, a New York-based private equity firm, bought Truven in 2012 for $1.3 billion, according to company filings. The deal is expected to be completed later this year.
ARLINGTON CAPITAL PARTNERS ACQUIRES IROBOT DEFENSE AND SECURITY BUSINESS
In February, Arlington Capital Partners entered into a definitive agreement to acquire the Defense & Security business of iRobot Corporation for $45 million in total consideration, including a contingent payment based on achieving certain milestones.
The business will operate as a newly created independent company, and will be the largest independent provider of ground-based robots to the U.S. Department of Defense, with a significant and growing global presence in the security, industrial, and international defense markets.
The transaction enables iRobot to focus on Home Robots and technologies for the connected home.
GENERAL DYNAMICS MISSION SYSTEMS ACQUIRES BLUEFIN ROBOTICS
General Dynamics Mission Systems acquired Bluefin Robotics, a manufacturer of unmanned undersea vehicles (UUVs) that perform a wide range of missions for the U.S. military and commercial customers.
Bluefin Robotics will become part of General Dynamics Mission Systems’ Maritime and Strategic Systems line of business. The value of the transaction has not been disclosed.
3 | Government Contractor | Quarterly Market Update | Q2 2016
NOTABLE M&A TRANSACTIONS
($ in Millions of USD, except for per share info) Recent % off Trailing Twelve Months ForwardStock Price 52 - Week Market Enterprise EV / EV / EV / EV / Revenue Growth
Company Ticker 3/31/2016 High Cap Value Revenue EBITDA Revenue EBITDA
The Boeing Company BA $126.94 (17.6%) 84,098.2$ 82,110.2$ 0.9x 9.1x 0.9x 7.9xHoneywell International Inc. HON 112.05 (2.6%) 85,307.6 90,265.6 2.3x 11.7x 2.2x 10.7xLockheed Martin Corporation LMT 221.50 (2.9%) 67,666.0 81,837.0 1.8x 12.3x 1.6x 11.9xAccenture plc ACN 115.40 (1.0%) 71,985.5 69,538.5 2.2x 13.2x 2.1x 12.4xGeneral Dynamics Corporation GD 131.37 (14.6%) 40,877.3 41,491.3 1.3x 8.9x 1.3x 8.8xRaytheon Company RTN 122.63 (5.7%) 36,666.1 39,353.1 1.7x 12.0x 1.6x 10.7xNorthrop Grumman Corporation NOC 197.90 (2.9%) 35,808.7 40,015.7 1.7x 11.3x 1.7x 11.6x
Large Prime Contractors Median 1.7x 11.7x 1.6x 10.7xLarge Prime Contractors Mean 1.7x 11.2x 1.6x 10.6x
($ in Millions of USD, except for per share info) Recent % off Trailing Twelve Months ForwardStock Price 52 - Week Market Enterprise EV / EV / EV / EV / Revenue Growth
Company Ticker 3/31/2016 High Cap Value Revenue EBITDA Revenue EBITDA
Harris Corporation HRS $77.86 (13.3%) 9,705.6$ 14,221.6$ 2.2x 9.7x 1.9x 9.4xL-3 Communications Holdings Inc. LLL 118.50 (9.8%) 9,186.4 12,705.4 1.2x 11.4x 1.3x 10.6xBooz Allen Hamilton Holding Corporation BAH 30.28 (3.4%) 4,505.3 5,932.2 1.1x 12.0x 1.1x 10.9xLeidos Holdings, Inc. LDOS 50.32 (15.5%) 3,631.3 4,063.3 0.8x 9.4x 0.8x 9.4xCACI International Inc. CACI 106.70 (1.6%) 2,587.8 3,523.8 1.1x 11.5x 0.8x 9.5xEngility Holdings, Inc. EGL 18.76 (47.8%) 689.5 1,799.3 0.9x 9.9x 0.9x 9.9xManTech International Corporation MANT 31.99 (6.1%) 1,205.4 1,164.1 0.8x 10.0x 0.7x 9.5xICF International Inc. ICFI 34.37 (16.9%) 651.8 955.5 0.8x 8.8x 0.8x 8.1xNCI, Inc. NCIT 14.01 (18.5%) 188.6 198.4 0.6x 6.9x 0.6x 6.7x
Other Defense Contractors Median 0.9x 9.9x 0.8x 9.5xOther Defense Contractors Mean 1.1x 9.9x 1.0x 9.3x
10.5x9.6x
10.9x11.0x
9.5x
10.9x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
Aerospace &Defense
IT Services Diversified
TEV/
EBIT
DA
3/31/2015 3/31/2016
1.5x
0.8x
1.5x1.6x
0.8x
1.6x
0.0x
0.2x
0.4x
0.6x
0.8x
1.0x
1.2x
1.4x
1.6x
1.8x
Aerospace &Defense
IT Services Diversified
TEV/
Reve
nue
3/31/2015 3/31/2016
4 | Government Contractor | Quarterly Market Update | Q2 2016
Date Closed /
Announced* Target Buyers/Investors
Deal Value
($mm) Business Description 05/06/2016 Prime Solutions, LLC Altamira Technologies Corp. - Prime Solutions provides cyber operations and capabilities to Intelligence Community
customers, most notably the NSA. The company's solutions include Computer Network Operations (CNO) and other technical cybersecurity services.
05/03/2016 Danya International DLH Holdings Corp 38.9 Danya provides compliance monitoring, communications, and other technology-enabled services to customers including HHS, the CDC, and DHS. The company specializes in telehealth research as well as health IT and information systems solutions.
04/12/2016 Van Dyke Technology Group Inc.
Jacobs Engineering Group - Van Dyke is a cybersecurity contractor focused on providing identity and access management (IAM), threat mitigation, and other cybersecurity services to the Intelligence Community and the DoD.
03/30/2016 netAura LLC CenturyLink, Inc. (NYSE:CTL) - netAura provides IT engineering and analytics services to commercial and federal clients. The company offers cybersecurity consulting services including security incident and event management (SIEM) platform assessment and security policy development.
03/25/2016 Miltec Corp. General Atomics, Inc. 14.6 Miltec provides weapons and defense systems engineering, integration, and test services, as well as program management for DoD and U.S. intelligence agencies.
*03/24/2016 Force 3, Inc. Sirius Computer Systems, Inc. - Force 3 is a network security company that specializes in infrastructure design, implementation, maintenance, and security support services. The company is an active contractor on several VAR product GWACs including SEWP V and CIO-CS.
*03/23/2016 Microsemi Corp. - RF Integrated Solutions
Mercury Systems, Inc. (NASDAQ:MRCY)
300.0 The RF Integrated Solutions unit designs high-frequency components for defense electronics applications. Products include log amplifiers, oscillators, multipliers, transceivers, switch arrays, and hardware for perimeter intrusion alarms for armed forces.
03/17/2016 Vormetric, Inc. Thales e-Security, Inc. 400.0 Vormetric provides data security solutions for businesses and government agencies in the U.S. and internationally. The company offers enterprise application, database, and server encryption and cloud storage compliance and policy management services.
03/15/2016 KEYW Corp. - SETA business unit
Quantech Services, Inc. 12.0 KEYW's SETA business performs Systems Engineering and Technical Assistance work for various government agencies. The company is divesting its SETA business to eliminate conflict of interest with several customers in order to focus on its core business.
03/15/2016 Pacific Architects and Engineers Inc. (PAE)
Platinum Equity, LLC - PAE provides integrated mission support services to U.S. and allied military organizations around the world. The company has capabilities in aviation, critical infrastructure, expeditionary logistics, security, maintenance, and training solutions.
03/14/2016 INDUS Corporation Tetra Tech, Inc. (NASDAQ:TTEK)
- INDUS is a government IT contractor that specializes in big data, analytics, and geospatial services, serving DoD, DHS, and U.S. intelligence customers. The company is active on IT product and services contracts including NETCENTS-2 and CIO-SP3.
02/22/2016 Bluefin Robotics Corp. General Dynamics Advanced Information Systems, Inc.
- Bluefin develops, manufactures, and operates autonomous underwater vehicles (AUVs) and accessories and specialized equipment. The company provides engineering, prototyping, testing, integration, training, and operations support services.
02/18/2016 Sigma Space Corp. Hexagon AB - Sigma is an engineering contractor that develops instrumentation for remote sensing, including LiDAR and laser ranging solutions for commercial and defense applications. The company serves both government and civilian customers.
*02/18/2016 Truven Holding Corp. IBM Watson Health 3,581.0 Truven is a health IT company that specializes in healthcare data integration and analytics solutions and services in the U.S. and internationally.
02/09/2016 Nova Defense & Aerospace International, LLC (NDAi)
Assured Enterprises Inc. - Nova is a defense contractor offering IT and business strategy consulting services to clients in the intelligence community. Its offerings include program and portfolio management as well as intelligence support services.
*02/04/2016 iRobot - Defense & Security business segment
Arlington Capital Partners - iRobot's defense and security business segment is the company's defense ground robotics unit, which delivers robotics technologies to the Department of Defense. Following the acquisition, the acquired business was relaunched as Endeavor Robotics.
02/02/2016 GATR Technologies, Inc. Cubic Corp. (NYSE:CUB) 232.5 GATR develops mobile satellite antenna systems for ground military use in remote or hostile areas. The company designs and manufactures deployable satellite antennas for various military customers and intelligence agencies in the U.S. and internationally.
02/02/2016 L-3 Communications - National Security Solutions
(NSS)
CACI International 550.0 L-3's NSS business unit delivers cybersecurity services, including defending networks and equipment against attacks and deterring breaches. The division supports military and government customers with cybersecurity solutions and support.
01/29/2016 New World Solutions Inc. SOS International, LLC (SOSi) - Defense contractor providing cybersecurity and ISR solutions for collecting, analyzing, and exploiting data. The company primarily serves NGA, NGIC, NRO, and other agencies at the forefront of the U.S. Intelligence Community.
01/29/2016 Wavefront Technologies, Inc. Ball Aerospace and Technologies Corp.
- Wavefront is an engineering and analytical services provider in the Intelligence Community specializing in cybersecurity. The company provides software development and network and systems engineering support to government and commercial clients.
*01/26/2016 Lockheed Martin - Information Systems & Global
Solutions (IS&GS)
Leidos Holdings, Inc. (NYSE:LDOS)
- Lockheed's IS&GS business segment is an industry leading government IT and defense contractor with customers across the federal government. The spin-off unit is merging with Leidos through a Reverse Morris Trust agreement.
01/14/2016 iSight Security, Inc. FireEye, Inc. (NASDAQ:FEYE) 268.6 iSight is a cybersecurity firm that offers cyber threat intelligence solutions to government and commercial clients in the U.S. and internationally. The company provides threat detection and mitigation services to combat and prevent complex attacks.
01/12/2016 Tetra Concepts, LLC Preferred Systems Solutions, Inc. (PSS)
- Tetra Concepts is a system architecture and software engineering contractor with capabilities in big data analytics and cybersecurity solutions. The company serves agencies throughout the U.S. Intelligence Community.
01/01/2016 Advanced Technology Solutions Inc.
EBA Engineering, Inc. - Advanced Technology Solutions provides geographic information systems (GIS) and IT consulting services, as well as software development and support to the U.S. government as well as customers in the utilities and transportation industries.
12/31/2015 L-3 Communications - Klein Associates Inc.
Mitcham Industries Inc. (NASDAQ:MIND)
10.0 Klein Associates designs and manufactures sonar equipment for maritime security and surveillance systems, including multi-beam side scan sonar systems for AUVs. The company serves the Navy and other military and civilian organizations around the world.
12/31/2015 Clearsoft Inc. Battle Resource Management, Inc. (BMRi)
- Clearsoft provides agile enterprise software development, cloud migration, systems integration, and business process assessment services. Its clients include defense and civilian agencies, as well as Fortune 500 companies.
SELECT MARKET ACTIVITY
5 | Government Contractor | Quarterly Market Update | Q2 2016
INDUSTRY AND AGENCY NEWS
NIH WANTS MORE VETERAN, HUBZONE SMALL BUSINESSES ON GWAC
The National Institutes of Health wants to add more companies to its CIO-Solutions and Partners 3 (CIO-SP3) Small Business government-wide acquisition vehicle and has declared open season for potential vendors to apply.
The GWAC is one of three the NIH IT Acquisition and Assessment Center (NITAAC) manages, and the only one set aside entirely for small businesses, including service-disabled veteran owned (SDVOSB), 8(a) and HUBZone vendors.
Just 94 contract-holders are on the small business GWAC. NITAAC expects to add 20 to 35 during this effort, with an eye toward boosting participation from some small business categories that are underrepresented.
CENSUS 2020 PAVES WAY FOR MODERNIZATION
The Census Bureau has ambitious plans to save $5 billion by modernizing the 2020 population enumeration.
For many citizens, the biggest impact is that the bureau will not send paper questionnaires to every household. Instead, for the first time, respondents will be able — and encouraged — to enter the information online, by computer or mobile device.
On the industry side, Census 2020 provides new opportunities for providing cloud-based solutions for meeting these new mission requirements.
WHITE HOUSE LAUNCHES INNOVATIVE ACQUISITION LABS
The White House is building labs for agencies to test and tinker with innovative acquisition methodologies, hoping to improve the way the government buys technology.
U.S. Chief Acquisition Officer Anne Rung and U.S. CIO Tony Scott issued a memo to CIOs and CAOs of CFO Act agencies directing them to establish IT-focused innovative acquisition labs by May 2.
GOVERNMENT APPROACHES $137 BILLION IN IMPROPER PAYMENTS IN 2015
Federal agencies issued an estimated $136.7 billion in improper payments during fiscal year 2015, the largest annual tally since 2004, when agencies first began reporting such data.
The figure, reported as part of the release of the government’s consolidated annual financial statements, was $12 billion higher than the Office of Management and Budget had projected for 2015. Additionally, for the first time since 2004, it raised the cumulative total of improper payments above $1 trillion.
The Medicare and Medicaid programs were responsible for the lion’s share of the overall total. Increased error rates in Medicaid during 2015 were the main culprit in driving up the government-wide improper payments figure.
FORMER WHITE HOUSE NATIONAL SECURITY ADVISOR TO LEAD NEW CYBERSECURITY COMMISSION
Former White House National Security Advisor Tom Donilon will chair the Commission on Enhancing Cybersecurity, a panel tasked with making recommendations to bolster the nation’s cyber defenses under the recently issued Cybersecurity National Action Plan.
The commission’s Vice Chair, Sam Palmisano, who is the former chief executive officer of IBM, will join Donilon.
GOVMATES BRIDGES GAP BETWEEN LARGE AND SMALL CONTRACTORS
A new service recently launched called govmates, which matches small and large government contractors seeking teaming opportunities.
This free service is becoming the fastest growing, go-to tool for large and small companies looking to generate additional revenue in today’s LPTA contracting climate.
Note: *Announced – not yet closed as of 3/31/2016
REPRESENTATIVE TRANSACTIONS
6 | Government Contractor | Quarterly Market Update | Q2 2016
For further information on our
Government Contractor Services,
please contact:
SC&H CAPITAL
Christopher HelmrathManaging Director
Matthew RobersonPrincipal
Greg HoganPrincipal
Kevin O’SullivanPrincipal
www.scandh.com
Baltimore, MD(410) 403-1500
McLean, VA(703) 287-5959
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 California, Connecticut, Delaware, District of Columbia, Florida, Louisiana , Maryland, Massachusetts, Missouri, North
Carolina, New Jersey, New York, Pennsylvania, Tennessee, Texas, Virginia, and West Virginia. 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.
7 | Government Contractor | Quarterly Market Update | Q2 2016
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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.
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