2015 Market Outlook: KippsDeSanto & Co. Managing Director Bob Kipps — M&A Activity Will Rise Prior to 2016 Presidential Election

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Bob Kipps, KippsDeSanto

WashingtonExec 2015 Market Outlook Series

We look forward to a new year and new opportunities for innovation and growth in the government contracting community. This past year, we experienced an increased emphasis on cybersecurity, the government’s procurement process and a perpetual focus on doing more with less.

WashingtonExec reached out to those most knowledgeable and experienced in the federal contracting space. We asked executives in and around the beltway for insight regarding where they see the government contracting community headed in 2015. Topics discussed include M&A activity, cloud computing, privacy issues, data collection, healthcare IT, defense and more.

KippsDeSanto & Co. Managing Director Bob Kipps predicts M&A activity will rise again in advance of the 2016 presidential election.

As expected, 2014’s GovCon M&A market ended on an uptick as — deal announcement-wise — the fourth quarter was the busiest quarter of the year. While the business-side of the GovCon market remains challenging from a budget and competitive perspective, many of the factors that contributed to the slight GovCon M&A volume increase in 2014 are expected to support continued deal activity into 2015.

As is often the case, the global threat environment and the expected allocation of scarce budget dollars are expected to heavily influence where the most aggressive buyer demand will be focused. For 2015, those areas clearly include cybersecurity, cloud computing, C4ISR, Big Data analysis, special operations and health IT. A strong capital market — both equities and debt — also supports continued investment and consolidation.

To achieve liquidity for their mature vintage investments, we also envision an increased level of deals involving private equity portfolio companies during 2015. Some of these transactions will be of healthy companies and some, unfortunately, could be sales of distressed or overleveraged businesses. Similarly, we expect continued divestitures from the larger industry firms as they continue to refine their focus on sectors they deem most strategic and compelling.

As we saw in 2014, deal valuations and terms we were very company specific based on the target’s size, contract profile, capabilities and market positioning. For example, larger intel-focused firms with differentiated offerings were acquired for multiples as high as 15-20 times their EBITDA, while the majority of the market for mid-size engineering and IT firms without significant differentiation or that are heavily dependent on preference program contracts and/or subcontract positions are being valued at 4-6 times their trailing EBITDA or finding little buyer interest at all. We expect that wide disparity to continue into 2015 given the scarcity of the most coveted acquisition candidates.

Right now, the newly Republican-controlled congress appears to be heading away from budget quarrels with Democrats and White House. Presuming that “détente” continues, GovCon M&A activity should rise again in 2015 ahead of next year’s Presidential election.

Related: Video Interview: Bob Kipps Talks M&A Market, Entrepreneurship and Why Deals Fall Through

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