Today’s 2012 Government Contracting insight comes from Bill Mutryn, Partner at Holland & Knight.
Bill Mutryn: “For the Government Contracting industry, I believe that business conditions will continue to be challenging. Defense spending will likely decline both due to a reduced budget and in anticipation of sequestration but IT budgets will remain relatively consistent with 2011. Cybersecurity, health care IT, intelligence, C4 and data analytics will continue to have ample funding although we could see some reductions in intelligence budgets. Competition for IT procurements will be intense and as a result, margins of winning bidders will likely decline and protest activity will be robust.
I expect M&A activity for 2012 to continue at a pace similar to 2011 due to (i) the quest for growth by strategic buyers and platforms of private equity sponsors in a stagnant budget environment, (ii) the competitive squeeze on mid-tier contractors that are above the small business revenue limits but smaller than other competitors, (iii) available capital by strategic buyers and favorable financing conditions, and (iv) the expected increase in capital gains taxes at the end of 2012. There will continue to be multiple tiers of valuations based on customers, capabilities, contracts, growth, backlog and margins and the difference in valuations between the most-desired and least-desired targets will widen. As a bold guess, I predict that one or two publicly held government contractor companies will be acquired and that no private government contractor companies will go public in 2012.”