Minuteman Ventures LLC REPORT FROM THE FRONT:

Minuteman Ventures LLC

‘REPORT FROM THE FRONT:Federal/Defense Technology M&A– ‘Who’s Buying, Who’s Selling, and

Why’

Conference: Examining the Economic Impact of SBIR and STTR

March 18, 2004

Paul Serotkin


Today…..

• The Federal/Defense Technology Company Universe

• Current M&A Environment• Seller/Buyer Profiles• M&A Valuation/Deal Pricing in the

Federal/Defense Technology Sector



• Investment Bank focused entirely on Federal/Defense Technology Sector

• Work with private firm owners approaching M&A as either 1) a first time strategic growth path, or 2) a liquidity event

• Founder involved with small business trade association in effecting passage of SBIR in 1982

• Work with private and public companies in transacting corporate transactions


The Federal/Defense Technology Company Universe

• Under $100m in revenue, often under $50m• Closely held, few shareholders, with perhaps an ESOP holding a minority

position and some option-holders; typically no outside capital• Geographically strong in two, possibly three locations• Having true market presence at two to three agencies• Widely ranging services, systems and solutions across a spectrum –

demarcated by degree of commoditization, classified/intel work and technology differentiation

- System engineering/integration, training, modeling/simulation, network services, technology R&D, legacy migration, database maintenance, logistics, software application development, program management/acquisition support, systems/platform systems, IT/communication technology

• Usually at least five years old, many times 15+ years duration• Founder often involved, at least in ownership, if not operations• Could have some SBSA/8a work remaining


Government Technology Firms- Industry Stratification, By Revenue,

FY02

Under $5m: 1.5% (19,674 Firms)

$5m-$10m: 6.20% (639 Firms)

$11m-$25m: 11.2% (513 Firms)

$26m-$50m: 11.0% (230 Firms)

$51m-$100m: 11.8% (124 Firms)

Over $100m: 58.2% (129 Firms)

Source: Eagle Eye Publishing/Government Services Insider


Favorable M&A Environment for Federal/Defense Technology Firms

• Supportive Capital markets- $2bn in new issues last 18 mos.; aggregate 50% increase in’03 enterprise values

• Inexpensive debt capital, with attractive lending ratios

• Government infusing more complex technology into processes and warfare

• More outsourced federal functions

• Public sector firms valued on basis of 15-20% annual growth

• Good visibility into future revenue, earnings and cash flow

• Modernization of legacy government IT systems

• Steady growth in government IT budget strongest in intel/defense and homeland security

LEADING TO: Robust M&A pricing; market values at/near historic highs


Reasons Behind the Robust Government M&A Market

Record levels of Federal/Defense Technology M&A Transactions. Why?

PART FEAR FACTOR, SECTOR MATURITY, CLASSIC MAKE V. BUY DECISION

• Sector Rotation – Defense in vogue today - Will it be tomorrow?• IPO ‘Buyer’ Class of ‘02 – will this potential buying class be smaller in a few

years, i.e., Veridian, Titan already sold• Active mid-tier buyers ($50m-$250m); strong private equity interest (success

stories – Anteon, SI, Veridian)• Well-positioned firms (intel, security, C4ISR, network-centric warfare, law

enforcement, public safety) yield M&A premium• Attractive tech firms supporting homeland security and 3-letter agencies• Large platform companies diversifying into services• Uncertainty in market –GWAC restructuring, small business recertification,

performance-based contracts, base closure, War on Terrorism and deficits affecting civilian agency budgets

Minuteman Ventures LLCSeller Transaction Profile – Defense/Federal

Technology(By Seller Size)

Observations(70+ transactions since Q4 ’02)

• Mostly smaller companies – 8 of 10 with revenue under $50m

• Ready willingness by large cos. to buy smaller ones

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

<$

20

m

$2

0m

- $

50

m

$5

0m

– $

10

0m

$1

00

m –

$2

50

m

$2

50

m -

$5

00

m

$5

00

m +


Buyer Transaction Profile – Defense/Federal Technology

(By Acquirer Size)

Observations(70+ transactions since Q4 ’02)

• Major SIs very active

• Smaller companies selectively transacting deals

• Mid-sized buyers using M&A to add strategic pieces

0%

10%

20%

30%

40%

50%

60%

$50

0m+

$50

m-$

100

m

< $

50m

$10

0m-$

250m

$25

0m-$

500m


Mid-Tier Companies: Growing, Robust Acquirers

• Profile: $50-$250m firms– Government is largest if only customer – Experienced organic growth and successfully integrated previous

acquisitions– Need to quickly add strategic pieces– Some backed by private equity– See path to become $500m companies– Are growing or want to grow faster than government technology market

• Lenders educated on government M&A, cost of debt capital still low• Promise of IPO; strategy and size both important• Immediate addition of clearances, key managers, new customers• Strong case for ‘buy v. make’ environment


Tier 1 Buyers Company Status Revenue ($ billions) Recent Transactions

SAIC Employee-owned 6.5 Atlantic Coast, EMA, AMA

Anteon Public 1.0 Information Spectrum

Boeing Public 50.5 Conquest

BAE Systems Public 18.2 Mevatec

Perot Systems Public 1.4 ADI, Soza

Northrop Grumman Public 28 XonTech

AMS Public .9 Vredenburg

SRA Public .5 Orion Scientific

CACI Public .9 C-CUBED

General Dynamics Public 16.6 Digital System Resources

L-3 Public 4.9 Aeromet

EDO Public .4 Adv. Eng & Research.

Raytheon Public 19.4 Solipsys

Lockheed Martin Public 31.6 Orincon

Mantech International Public .7 Integrated Data Systems


Tier II Buyers

Company Status Revenue-’03 Recent Transactions

SI International (SINT)

Public $170m MATCOM

Wireless Facilities (WFII)

Public $230m High Technology Solutions

MTC Tech. (MTCT)

Public $175m Vitronics, ICI

Dynamics Research (DRC)

Public $245m Andrulis, HJFord

DigitalNet (DNET)

Public $330m User Technology Associates

PEC Solutions (PECS)

Public $178m Vector Research


Tier III Buyers

Company Status Revenue Recent Transactions

ITS Services Private $200m SEA

NCI Private $136m Scientific & Engineering Solutions

Sytex Private $275m MacAuley-Brown

Stanley Associates Private $190m Fuentez Systems

STG Private $170m Decision Systems Tech.

Alion Science and Technology

Private $200m Innovative Tech. Solutions

ICF Consulting Private $160m 2 Arthur D. Little units

RCI Private $274m Innerbase Technologies

American Systems Corp.

Private $175m Business Plus Corp.


Tier IV Buyers

Company Status Revenue Recent Transactions

FC Business Systems Private Under $100m AmerInd

Innovation Technology Appl.

Private “ IT Specialists, DKCS

Management Systems Designers, Inc. (MSDI)

Private “ Kathpal Technologies, ClearBrook Solutions

Indus Corporation Private “ --

SFA Private “ The Analysis Corp.

Axiom Resources Private “ Keymind

CHM Private “ ECICalibre Systems Private “ Strategic Mgt. Initiatives


Who’s Buying Whom

BUYER:

SELLER: Under $20m SELLER: $20m - $50m8.1%

13.5%

21.6%

21.6%

5.4%

29.8%

73.9%4.4%

8.7%

13.0%

Under $20m

$100m-$250m

$20m-$50m

$250m-$500m

$50m-$100m

$500m+


Who’s Buying Whom (cont’d)

SELLER: $50m-$100m SELLER: $100m-$250m

50.0%

37.5%

12.5%

BUYER:

Under $20m

$100M-$250m

$20m-$50m

$250m-$500m

$50m-$100m

$500m+

100% 100%

SELLER: $500M+


Federal/Defense Technology M&A Valuation – Size/Specialty Matters

Category (by revenue)

Transaction Value -Baseline

Size Premium (Relative to

baseline)

Under $25m 6X EBITDA - - -

$50m 1.2x

$100m 1.5x

Specialist Firms (size irrelevant)

1.5x-plus


M&A Valuation

Company type Enterprise Value/Revenue

Enterprise Value/EBITDA

Intel .96x 9.9x

Engineering/IT Services

.70x 8.1x

Base Operations .39x 7.7x

Source: Houlihan Lokey Howard & Zukin


Technology Makes a Difference in Federal/Defense IT Transactions

Buyer Seller Purchase Price Revenue Price-to-Rev.

Raytheon Solipsys $170m $35m 486%

DRS Paravant $110m $52m 213%

Mantech Aegis Research

$69m $60 115%

Northrup Grumman

Xontech $73

Lockheed Martin

Orincon $49

General Dynamics

Digital Systems Resources

$125


The ‘Value Table’ – 10 Factors in Determining Federal/Defense Technology Company Value

1. Contract Alignment with the ‘Mission de Jour’- Technology, key customers

2. Cleared Employees

3. Recaptured Business

4. Prime Contract Awards

5. Small Business Set Aside (SBSA) Awards

Weak Alignment - 1Strong Alignment - 10

0-20% Employees Cleared - 120-60% Cleared60% or Over Cleared - 10

0-20% Recompete Revenue - 120-50% Recompete50% or Over Recompete - 10

0-20% Prime Contract Revenue - 120-70% Prime70% or Over Prime - 10

70-100% SBSA Revenue - 130-70% SBSA30% or Under SBSA - 10


The ‘Value Table’ – 10 Factors in Determining Federal/Defense Company Value (cont’d)

6. Time in Business

7. Contract Concentration

8. 8a Revenue

9. Competent Management

10. Sustained Revenue Growth

1-3 years - 14-6 years7-10 years - 10

60%+ revenue from 1 contract - 125-60% less than 25% - 10

50-100% rev. from 8(a) - 115-50% from 8(a)Less than 15% from 8(a) - 10

Lightly regarded management - 1Highly regarded management - 10

0-7% compounded ann rev. growth - 18-15% growth15%+ growth - 10


Conclusions

• Federal/Defense Technology M&A Market remains robust

• Buyers come from all size firms; Mid-tier firms stepping up

• Technology advancement, infusion can be true pricing discriminator

• M&A pricing gradation based on size, differentiators

• Consolidation figures to continue for some period


Contact Data

Paul SerotkinPresident

Minuteman Ventures LLC781 750 8065

781 254 7267 [email protected]

www.minutemanventures.com

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Minuteman Ventures LLC REPORT FROM THE FRONT: