Volume 3, Issue 2 June 2005

Welcome to the Federal Growth Report, the newsletter published by Minuteman Ventures LLC, an investment bank that focuses on mergers and acquisitions.

Our newsletter addresses issues of importance to leaders in the federal contracting sector. These people build companies and increase equity value.

Regards,

Paul Serotkin
President
Minuteman Ventures LLC



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in this issue
 
Not for Sale — Smaller Federal Contractors Arise as Buyers - The emergence of smaller company buyers in the federal services sector.
A Challenge for Selling Small Businesses: the SBA's Novation Regulation - Attorneys Mazza and Franco give the definitive word on the rule's effect on federal M&A.
Federal M&A Musings
The Federal Deal - Infobase reviews the recently announced intent of McDonald Bradley to acquire Infodata.
Contract Central - Infobase highlights key recent contracts to federal contractors.
Deals of the Month - Check out the latest sector deals.
Minuteman Ventures LLC News

The Minuteman Federal Deal Meter
  Purchase price  
  Under $50m $50–100m Over $100m Total Deals
YTD 2004 22 2 3 27
YTD 2005 25 6 4 35

For more on this chart, click here.


Minuteman Ventures LLC advises company owners on the sale of their businesses, and assists corporate and private equity buyers in strategic acquisitions and divestitures. Our team consists of experienced entrepreneurs and business executives who founded or operated companies and corporate divisions.

We specialize in companies that sell services and product solutions to federal government clients. We pride ourselves in being the investment bank for entrepreneurial companies in the federal sector.


Not for Sale — Smaller Federal Contractors Arise as Buyers

To whom should smaller company CEOs look when selling their federal services firm? Surprisingly, the answer today is other smaller firms, as well as their mid-tier brethren — which have embarked on acquisition programs to augment their organic growth.

Thus, while SAIC, CACI, Anteon and other large firms still make attractive acquirers, they increasingly are facing competition from small and mid-sized companies. The evidence is clear when reviewing the 70 acquisitions by corporate buyers in 2004 in the sector (excluding private equity transactions):

Corporate Acquirer Size, by Revenues Number of Transactions
$500 million or more 24 (34.2%)
$250–$500 million 14 (20%)
$100–$250 million 8 (11.4%)
$50–$100 million 8 (11.4%)
Less than $50 million 16 (23%)

Examples of recent smaller acquirer success stories include:

— Technology Service Corporation, a LA-company with broad DC area operations, finds a stronger home in Huntsville by acquiring Phase IV Systems;

— Digital Fusion, Huntsville, expands its local presence with the acquisition of Summit Research;

— FC Business Systems, Fairfax, doubles its revenues by picking up Computer and High Tech Management;

— Stanley Associates, Alexandria, on the upper end of the mid-tier with close to $300 million in revenues, grows by buying Fuentez Systems; and

— Planning Systems, Reston, expands its market footprint by acquiring Neptune Sciences.


Click here to read the rest of the article…


* This article appeared in a recent supplement issue to the Washington Business Journal sponsored by the National Capital Chapter of the Association for Corporate Growth. Paul Serotkin, President of Minuteman Ventures LLC, authored the piece. Contact him at paulserotkin@minute manventures.com, 781-750-8065. See www.bizjournals.com/washington/ for more on the publication.

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A Challenge for Selling Small Businesses: the SBA's Novation Regulation

By Pamela J. Mazza and Antonio R. Franco

Owners of small businesses performing government contracts should be aware of a recently issued regulation that may impact their ability to sell their companies.

Generally, successful small businesses in the government contracting arena have a backlog consisting of contracts awarded as small business set asides. This regulation may have a significantly adverse impact on the ability of these companies to sell these contracts or the company itself.

Specifically, the SBA has amended its size regulation by, among other things, adding a subsection which provides that when a novation or change-of-name agreement has been executed pursuant to FAR subpart 42.12, the new entity must submit a written self-certification that it is small so that the procuring agency may take the appropriate small business credit (see 13 C.F.R. 121.404(i)).


Date of Rule Change

Under this size regulation, if a small business is sold after June 21, 2004, and a novation is required, the buyer must submit certification of small business size status along with the novation documentation. This rule was initially to be effective for all solicitations issued on or after June 21, 2004. However, subsequent to the issuance of the final rule, the SBA issued a technical correction stating that the rule shall be applied to any novation (and change-of-name) documentation executed on or after December 21, 2004, regardless of when the solicitation for the relevant contract was issued.


Prior Selling Attribute Diminished

This regulation does not require that the transferred contracts be terminated, nor does it prohibit options under such contracts from being exercised, if the buyer is unable to certify as a small business. Rather, in that event, the procuring agency would no longer be able to count the contract (including any exercised options) towards its small business goals.

This rule may have a serious adverse impact on small companies performing contracts with small business eligibility requirements that are contemplating selling their businesses. The prior SBA regulations provided that a small business's size was determined at the time it submitted its final proposal, including price, for a small business set aside contract. If the assets of a small business, including its government contracts, were purchased by a large business, the new company performing the contracts was still considered small until completion of the contracts, including any options. This was an extremely marketable selling point for owners of small businesses.

However, the revised regulations cause the buyer (or the new combined entity) to have to re-certify as small at the time the novation documentation is submitted to the procuring agency, which could be several years after the small business set aside contract was awarded and after the seller company is no longer considered small.

Further, the new entity would have to determine its size based upon the joint employees or revenues of the new combined company. A procuring agency, anxious to meet its small business goals, may be reluctant to exercise options under pending small business set aside contracts once it is apprised that the business performing the contract is not small. This diminishes the value of such contracts and causes small businesses performing such contracts to be less attractive to potential buyers.


Rethinking the Transaction Structure

Given this rule, small companies that are contemplating the sale of their businesses to larger entities may need to reconsider the structure of such transactions. The novation of a federal government contract is required in connection with the sale of all of the assets of the contractor's businesses, or the entire portion of the assets involved in performing the contract. This includes the sale of a business where the transaction is structured as an asset sale, merger or corporate consolidation.

However, a novation is unnecessary when there is a change in ownership of the contractor as a result of a stock purchase, provided that: (i) there is no legal change in the party contracting with the government, and (ii) the contracting party remains in control of the assets and performs the contract. These conditions are satisfied in the case of stock sales, as the small business set aside contract remains with the small business, which will continue to perform the contract. Thus, the buyer is not required to submit certification of small business size status in connection with a stock sale.

Additionally, although the federal regulations contemplate novation in the case of mergers, an argument could be made that when a buyer (in this case, a large business) merges into a selling entity (in this case, a small business), rather than the reverse, the aforementioned conditions are also satisfied. There is generally no legal change in the selling entity (which is a matter of state law) and the selling entity remains in control of the assets and performs the contract. Thus, the parties could take the position that novation should not be required when the transaction is structured as a merger wherein the acquired small business survives. However, the implications of such a decision are uncertain.


Stock Sales and Certain Mergers May Not Be Feasible

Structuring the transaction as a stock sale, or a merger wherein the acquired small business survives, may not always be acceptable to the prospective buyer. Buyers typically resist stock acquisitions because they generally result in the assumption of all of the seller's liabilities. Further, in some circumstances, the tax consequences of structuring a business as a stock sale may not be as favorable to the parties.

Additionally, many buyers would be reluctant to structure an acquisition as a merger into the small business, whereby the buyer would be merged out of existence. Further, the buyer may be reluctant to proceed with such a merger as it may result in negative tax consequences.


SBA May Promulgate Further Regulations

Finally, it is important to note that when the SBA issued the rule, it stated that it concurred with the view of proponents of the rule that the SBA should consider re-certifications for other acquisitions in addition to those for which novation is required, such as the acquisition of stock. However, the SBA's final rule failed to provide for re-certification in the case of stock sales. Thus, this rule may not have fully accomplished its intended purpose and the possibility exists that the SBA may issue a technical correction or promulgate a new regulation in the near future.

This article is an update of a prior article that appeared in Federal Growth Report in August of 2004. Pamela J. Mazza and Antonio R. Franco are partners in the law firm Piliero, Mazza & Pargament, PLLC, which specializes in Government Contracting and Relations, Corporate Counseling and Transactions, Small and Minority Businesses, Native American Law, and Employment Law. You may contact them at 202-857-1000 or email them at pmazza@pmplawfirm.com or afranco@pmplawfirm.com. For more on the firm, click here.

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Federal M&A Musings

New Frontiers in Federal Services Financing… Leave it to the veteran fund managers at CM Equity to push the envelope for federal M&A. Peter Schulte, Joel Jacks and crew have filed a S-1 with the SEC to launch the Federal Services Acquisition Corporation (FSAC).

CM Equity and affiliated funds count at least three companies in their federal portfolio — AverStar (sold to Titan), RCI (sold to SERCO), and ICF Consulting.

FSAC is a blind pool in effect, inviting investors to fund a company whose sole purpose is to acquire a sizable federal services firm. FSAC has no operations at current; when (and if) the offering is completed, FSAC must use at least 80% of its then net assets to acquire a federal services contractor.

The offering targets gross proceeds from the capital raise of $126 million. If the stated transaction is not completed within 18 months of the transaction close, then FSAC will return the proceeds (minus certain transaction and operating costs) to investors. FSAC share units, which include two warrants for every share purchased, would trade under the OTC Bulletin Board.

Association Group Recognizes Top 2004 Federal Deal-Makers… The National Capital Chapter of the Association for Corporate Growth (ACG) recently held its annual award dinner to recognize those in the federal sector that excelled at M&A last year.

CACI's acquisition of AMS won the Deal of the Year while Lucy Reilly Fitch, BAE Systems' M&A chief, copped the top corporate Deal Maker award.

Bank of America's Peter Knickerbocker was voted the top Capital Provider. Growth Companies of the Year awards, selected by size, respectively went to SRA International (large), Trex Company ($100–$500 million), and Essex Corporation (under $100 million). See www.acgcapital.org/awards/ for more.

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The Federal Deal

FGR offers analysis of a recent M&A transaction involving government services contractors. The analysis is written by Stuart McCutchan, president and CEO of InfoBase Publishers, Inc. © and editor of the Defense Mergers & Acquisitions, a premier source for information on defense/aerospace M&A. Opinions expressed below are those of InfoBase. All rights reserved. For more on InfoBase Publishers' services, contact Bill Burton (410-820-6821, wkburton@infobasepub.com ).


McDonald Bradley Inc. (MBI) to Acquire Infodata Systems


DISCUSSION

Privately held McDonald Bradley Inc. (MBI) signed a letter of intent to acquire Infodata Systems, Inc. (OTCBB: INFD.OB) a provider of open solutions for enterprise content management.

Herndon, Va.-based Infodata Systems delivers open, enterprise-class content management solutions that assist in ensuring the integrity and compliance of content. The company designs, develops and implements solutions by means of the emerging Content Management Services Layer ("CMSL") that delivers its middleware-based applications to reduce the complexity of bringing content together with its associated critical business processes in order to foster compliancy and the secure management of content across its lifecycle. Based just outside Washington, D.C., in Herndon, VA, Infodata has over 35 years of proven ability in providing comprehensive content management solutions to the Government, Intelligence and Commercial communities.

MBI president and CEO Kenneth Bartee stated: "The Infodata core business is very complementary to and supportive of our work in Horizontal Fusion across the Department of Defense. This strategic acquisition enables us to leverage our expertise in this technology area while at the same time allows us to quickly expand the McDonald Bradley presence and our technical proficiency throughout the intelligence community."

Infodata president and CEO Edwin Miller stated: "MBI is a good fit for Infodata because our business and customer bases are complementary and our headquarters are only five minutes apart in Herndon, Virginia, which will facilitate a smooth and rapid transition and integration. As a larger, private entity, MBI has the resources to expand Infodata's existing backlog and pipeline of Intelligence and Government business without the constraints and costs of being a small public company. During the past several months, Infodata's board of directors considered various strategic alternatives and believes that at this time, this opportunity with MBI offers the best value for our shareholders and employees."


TERMS

On May 12, 2005 McDonald Bradley Inc. (MBI) signed a letter of intent to acquire Infodata Systems for $7.56 million in cash.

The cash offer is for 100% of the stock of Infodata. Based on a current estimate of 6.3 million outstanding shares on a fully diluted basis, the per share purchase price would be $1.20 Based on a current estimate of 5.3 million outstanding shares on a non-fully diluted basis, and on the closing market price of $1.18 per share on May 11, 2005, the purchase price is approximately $1.3 million above Infodata's current market capitalization. The transaction, which is planned to close by July 31, 2005, is subject to approval by Infodata's shareholders and other customary conditions of closing, including satisfactory completion of due diligence by MBI.

A definitive agreement is expected to be signed within the next two weeks. The transaction, which is planned to close by July 31, 2005, is subject to approval by Infodata's shareholders and other customary conditions of closing, including satisfactory completion of due diligence by McDonald Bradley. Once the deal is concluded, Infodata will be merged into McDonald Bradley and become private. Infodata employees will be integrated into various McDonald Bradley operations and lines of business.

Infodata had revenues of $9.7 million for the year ending Dec. 31, 2004, up from $8.4 million the previous year. As of March 1, 2005, Infodata had a total of 67 employees.

In the Government segment, total revenues were approximately $2.5 million for the year ended December 31, 2004, an increase of approximately $765,000, or 45%, up from total revenues of approximately $1.7 million for the previous year.


ANALYSIS

If one were casting an M&A melodrama, a call to central casting couldn't produce two more interesting players than Infodata Systems and McDonald Bradley.

Infodata Systems fills out the role of Spurned Ingenue nicely. Three years ago last month the company received notification from SAIC that its planned acquisition Was Not To Be… with no reasons given. But the numbers since the SAIC dalliance tell a story which, if not tragic, certainly helps to explain SAIC's lack of ardor… modest declines in revenues and headcount, and a $364,000 loss in the most recent quarter. Not anybody's dream girl, but… in the hands of the right acquirer, maybe a company capable of blossoming. There are bright spots here. The company's Government business grew 45 percent last year. And the company is participating in good markets, particularly the enterprise content management (ECM) marketplace, which analysts value at $1 billion and mark for rapid growth.

In the role of Young Company Out on Its Own… McDonald Bradley. Two years ago the privately-held IT solutions provider lost its founder, chairman, majority shareholder, and all-around mother figure when Sharon McDonald acquiesced to a management buyout. But the company hasn't stumbled under new ownership. Revenues were $20 million in 2002, about $30 million in 2003, and — if the 32% growth rate which it has been posting for more than a decade held steady — maybe $40 million in 2004.

The company is not relying on its existing businesses to maintain that growth rate going forward. This deal follows the buy of McLean, Va.-based Domain Technologies, Inc. in 2002, a provider of web-based information systems for the government intelligence and law enforcement community. Both that deal and the current one are consistent with what the company says is "an aggressive, strategic business goal to drive growth through enlarging its foothold in the intelligence agencies." Along these lines, it notes that it "recently opened an office near Ft. Meade to facilitate support of current and future projects at the National Security Administration (NSA)." And certainly it has taken notice of one of the few bright spots in Infodata's business mix: its strongly growing Government business. And, in its own announcement of the deal, its reference to the "the Infodata core business" suggests that may be all of the company it intends to keep.

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Contract Central

FGR presents briefs on selected technology services contracts awarded by the U.S. government to federal contractors during the last two months. The briefs are compiled by InfoBase Publishers, Inc.©, a leading provider of competitive intelligence for the worldwide defense/aerospace industry. All rights reserved. For more on InfoBase Publishers' services, contact Bill Burton (410-820-6821), wkburton@infobasepub.com or click infobasepub.com.


Army PEO STRI Taps Azimuth to Support West Virginia National Guard Preparedness Training

On behalf of the U.S. Army Program Executive Office, Simulation, Training & Instrumentation (PEO STRI) (Orlando, FL), the U.S. Naval Air Warfare Center - Training Systems Div. (NAWC-TSD) (Orlando, FL) awarded Azimuth, Inc. (Morgantown, WV) a five-year, $18 million contract (N61339-05-C-0090) for prepared training and support.

Under the contract, the company will provide operations, maintenance, training, and training support for a Weapons of Mass Destruction (WMD) consequence management and counter-terrorism training and testing facility at the Center for National Response (CNR) Memorial Tunnel in West Virginia. Concurrently, Azimuth will execute appropriate testing programs for evaluating emergency response apparatus and equipment. The facility is owned by the state of West Virginia and operated by the West Virginia National Guard (WVNG).

The center was established by direction of Congress in the FY00 defense appropriations bill. Congress' intent was to initiate a cost-effective way to prevent, prepare, and respond to a terrorist attack in the U.S. involving WMD. The CNR at the Memorial Tunnel is a unique, one-of-a-kind training facility that provides realistic and challenging exercises for military and civilian first responders. It allows response teams to practice their tactics, techniques and procedures and experiment with new equipment without disrupting commercial or public activities. PEO STRI's Customer Support Group, with support from the Directorate of Contracts, initiated the program. It will be managed by the Army's Project Manager, Field Operations and Support.

The contract was competitively procured through solicitation N61339-05-R-0020, which was issued in February 2005 and called for competition limited to service-disabled veteran- owned small business (SDVOSB) (NAICS 611699). A total of five offers were received.

The procurement is considered a follow-on effort. The incumbent was Titan Corp. (San Diego, CA).


CBP Picks Pragmatics to Test ACS Software

The U.S. Bureau of Customs and Border Protection (CBP) (Washington, DC) awarded Pragmatics, Inc. (McLean, VA) a five-year, $65 million blanket purchase agreement (BPA) for independent verification and validation (IV&V) of software being used in the Automated Commercial System (ACS), the precursor to CBP's Automated Commercial Environment (ACE).

Under the BPA, the company will test software written by several other companies, including IBM, the agency's prime contractor for ACE. According to a report by Government Computer News, "The types of tests are functional testing, performance testing, and regression testing to make sure that when you make a change, it doesn't break something else."

The contract, the largest in the company's 20-year history, was competitively procured through a solicitation that limited competition to small businesses only.


LaRC Selects Incumbent SAIC in ESSSO Support Recompete

The NASA Langley Research Center (LaRC) (Langley, VA) awarded SAIC Research, Development, Test and Evaluation (RDT&E) Group (McLean, VA) a five-year, $110 million, cost- plus-fixed-fee, IDIQ contract for Earth and space sciences evaluations, assessments, studies, services, and support for LaRC's Earth and Space Science Support Office (ESSSO) (Hampton, VA) and NASA Headquarters' Science Mission Directorate (Washington, DC).

Under the contract, the group's Space, Earth and Aviation Sciences (SE&AS) business unit will support ESSSO by performing proposal and mission concept evaluations; assessments; studies; information management services; and administrative support. ESSSO develops efficient methodologies for evaluation processes. The office develops Announcement of Opportunities and NASA Research Announcements, conducts on-site evaluations, and conducts technical management, cost, and other program factors (TMCO) evaluations and proposals. In addition, upon request, the ESSSO ensures that the criteria for high quality science return is within budget and that schedule constraints are met.

SAIC's subcontractors, all small businesses, are:

— Analytical Mechanics Associates, Inc. (AMA) (Hampton, VA).

— Genex Systems (Hampton, VA).

— Futron Corp. (Bethesda, MD).

— Global Science & Technology, Inc. (Greenbelt, MD).

— AZ Technology (Huntsville, AL).


NASA GRC Taps SGT for Technical Information, Administrative, and Logistics Services (TIALS)

NASA Glenn Research Center (GRC) (Cleveland, OH) awarded SGT, Inc. (Greenbelt, MD) a 10-year, $205 million, performance-based, cost-plus-award-fee, award-term contract to provide Center-wide operations support services under the Technical Information, Administrative, and Logistics Services (TIALS) program.

Under the contract, the company will perform work that includes logistics, imaging technology, scientific and technical publishing, metrology services, library, administrative and clerical support.

SGT's subcontractors include:

— RS Information Systems, Inc. (RSIS) (McLean, VA).

— Honeywell Technology Solutions, Inc. (HTSI) (Columbia, MD).

The contract was competitively procured through solicitation NNC04052948R, which was issued on August 31, 2004, and called for competition limited to 8(a) firms only (NAICS 561210; $30 million). Proposals were due on October 21, 2004.

The procurement is considered a follow-on effort. The incumbent was InDyne, Inc. (McLean, VA), which performed the work previously under a $104.3 million contract (NAS3-99179) awarded in June 1999. The previous effort was known as the Management & Operations Contract III (MOC-3).


Navy FISC Picks Aquasis in Small Business Recompete to Support TRAWING FIVE

The U.S. Navy Fleet Industrial Supply Center Norfolk, Philadelphia Detachment (FISC) (Philadelphia, PA) awarded Aquasis Services, Inc. (Pensacola, FL) a 27-month, $5.8 million, firm-fixed-price contract (N00140-05-C-0073) to provide administrative support services for Training Air Wing (TRAWING) Five (TW 5) located at Naval Air Station (NAS) Whiting Field (Milton, FL).


Navy FISC Taps I.E. Discover for Litigation Support Services

The U.S. Navy Fleet Industrial Supply Center, Norfolk Detachment - Washington (FISC) (Washington, DC) awarded I.E. Discovery, Inc. (Austin, TX) a five-year, $45.8 million, cost- plus-fixed-fee, IDIQ contract (N00600-05-D-0186) in the amount of $8,800,000 for general litigation support services to support the Navy Office of General Counsel - Litigation Office (Washington, DC).

Under the contract, the company will perform work that supports judicial, administrative, and alternate-dispute- resolution forums. The litigation support and automated litigation support will help the Navy attorneys acquire, organize, develop, and present evidence and legal analysis

The contract contains a one-year base (worth $8.8 million) and four one-year options that, if exercised, could increase its total cumulative value to $45.8 million and extend the period of performance through September 2010. Funds will not expire by the end of the fiscal year.

The contract was competitively procured through solicitation N00600-04-R-0389, which was issued on August 10, 2004, and called for competition limited to small businesses only (NAICS 541199).


Navy PHDNSWC Picks Incumbent ESN in Combat System Engineering Recompete

The U.S. Naval Surface Warfare Center, Port Hueneme Div. (PHDNSWC) (Port Hueneme, CA) awarded Engineering Services Network, Inc. (ESN) (Arlington, VA) a 10-year, $67.6 million, cost-plus-fixed-fee, IDIQ contract (N63394-05-D-1269) to provide combat systems engineering in support of PHDNSWC's Combat Systems Engineering and Integration Branch (Codes S15, S20, and S22).

Under the contract, which has an estimated level of effort (LOE) of 90,944 labor-hours per year, the company will assist in planning and coordinating the installation and testing of as well as resolution of issues relating to Combat System Ship Platform Integration in aircraft carriers, L-Class ships, and other strike group units.

The work supports the Navy's Program Executive Officer (PEO) Carriers (PMS-312/PMS-378), PEO Ships (PMS-470), the Naval Sea Systems Command (SEA-06/SEA-62), and PEO Integrated Warfare Systems (PEO IWS) as the In-Service Engineering Agent (ISEA). Work will be performed aboard U.S. Navy ships (80%) and at government facilities in Washington, DC (15%), and Port Hueneme, CA (5%).


Navy SPAWAR Selects Two to Provide GWOT C4ISR Support Services

The U.S. Naval SPAWAR Systems Center Charleston (SSC-C) (Charleston, SC) awarded two parallel, five-year, cost-plus- incentive-fee, performance-based, IDIQ contracts, worth $530.6 million collectively, for for Global War on Terrorism (GWOT) C4ISR support services (formerly anti-terrorism force protection support services).

The recipients were:

— Applied Marine Technology, Inc. (Virginia Beach, VA), which was awarded a $271.8 million contract (N65236-05-D -7862).

— Gemini Industries, Inc. (Billerica, MA), which was awarded a $258.8 million contract (N65236-05-D-7863).

Under the multiple-award program, these two companies now will compete for task orders that cover engineering, analytical, technical, and programmatic support services for GWOT C4ISR systems and projects. Task orders will involve engineering support; exercise, operational, and training support; maintenance and technical support; acquisition support; and program management support.

The contracts were competitively procured through solicitation N65236-04-R-0089, which was issued on November 23, 2004, and called for competition limited to small businesses only (NAICS 541330). Proposals were due on December 23, 2004. A total of three offers were received.


Navy SWRMC Picks Epsilon Systems in 8(a) Competition for Engineering/Technical Support Contract

On behalf of the U.S. Navy Southwest Regional Maintenance Center (SWRMC) (San Diego, CA), the U.S. Navy Fleet Industrial Supply Center (FISC) (San Diego, CA) awarded Epsilon Systems Solutions, Inc. (San Diego, CA) a 52-month, $63.2 million, IDIQ contract (N00244-05-D-0045) for engineering and technical support services.

Under the contract, the company will provide engineering, technical, training, installation, repair, and program support of engineering systems along with personnel, tooling, and necessary facilities to perform troubleshooting and failure mode analysis, logistics support, fleet support, industrial and installation support of engineering systems.


NSWC-PC Taps Thomas Associates in 8(a) Competitition to Support Damage Control Programs

The U.S. Naval Surface Warfare Center, Panama City (NSWC- PC) (Panama City, FL) awarded Thomas Associates, Inc. (Stevensville, MD) a five-year, $29.9 million, cost-plus-fixed- fee, IDIQ contract (N61331-05-D-0025) for damage control program engineering, logistics, and technical support for U.S. Navy ships.

Under the contract, the company will support a variety of shipboard damage control initiatives aboard U.S Navy ships. Programs such as the Damage Control Training Management System provides real-time, dynamic ship status and parametric information to Damage Control Training Teams, and accepts feedback on actions taken by team watch standers. Work will be performed in Stevensville, MD (85%); Norfolk, VA (10%); and Panama City, FL (5%).


USAF AFRL WRS Taps Two for TOPS III

The U.S. Air Force Research Laboratory, Wright Research Site (AFRL WRS) (Wright-Patterson AFB, OH) awarded two parallel, six-year, IDIQ contracts, worth $99.7 million collectively, for Technical Operations Support III (TOPS III).

The recipients were:

— Anteon ISG - Air Force Programs (Fairfax, VA) (FA8650-05-D-5806).

— Universal Technology Corp. (Dayton, OH) (FA8650-05- D-5807).

Under the multiple-award program, these two companies now will compete for task orders to support the Materials and Manufacturing Directorate (AFRL/MLM) with a quick turnaround capability in acquiring short-term external analyses, technical assessments, specialized testing, strategic studies, workshops and presentations furthering basic and applied research, as well as advanced development efforts in core areas of materials technology, including: Polymers, Organic Matrix Composites and Tribology and Coatings, Metals, Ceramics and Nondestructive Evaluation, Materials and Processes for Sensors and Laser Hardened Materials, Manufacturing Technology/ Manufacturing Research, Systems Support Research (AF fielded systems, i.e., F-16 material problem), Air Expeditionary Force (rapid deployment operations).

This work will be complete by May 2011. The Air Force can issue delivery orders totaling up to the maximum amount indicated above, although actual requirements may necessitate less. At this time, $35,000 of the funds have been obligated.

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Deals of the Month

Closing/
announcement date
Buyer Seller Purchase Price Seller Revenue
June 10, 2005 Federal IT Systems IT Spatial N/D N/D
June 9, 2005 SRA International Galaxy Scientific Corp. N/D $90m
June 3, 2005 L-3 Communications Titan Corp. $2.65B $2.05B
May 24, 2005 Applied Signal Technology Dynamics Technology $30m $18.1m
May 12, 2005 McDonald Bradley Infodata Systems $7.6m $9.7m
May 12, 2005 SAIC Object Sciences N/D 133 employees
May 4, 2005 Mantech Grayhawk Systems $100m $90m
May 3, 2005 LEDS E-Secure Systems N/D N/D
April 25, 2005 Nortel Networks PEC Solutions $448m $202.7m
April 19, 2005 SRA International Touchstone Consulting Group N/D $27m
April 18, 2005 Versar Parsons Corp (Cultural Resources Group) N/D $1.5m
April 14, 2005 Sensis Corp. Seagull Technology N/D 40 employees
April 14, 2005 Titan Corp. Intelligence Data Systems, Inc. $42.5m N/D
April 2005 Pal-Tech Development Associates N/D $15–20m

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Not for Sale (continued)


Why the Boom?

Simply put, smaller firms have discovered their inherent advantage over large company M&A competitors: the Culture Trump Card.

Mid-sized firms still have that feel of entrepreneurship so appealing to selling founders (whether or not they remain post-deal), giving acquired company management ready access to the acquirer's management team. The seller's owners and employees retain a sense of criticality in the acquiring company, as their revenue and profitability may be material to the buyer. In addition, with capital a relative commodity and benefit structures mostly within an accepted best practices range, culture can be a huge differentiator for modest sized firms. While bureaucracy can creep into even fairly small companies, those un-fossilized smaller firms can count on the entrepreneurial way as a large selling carrot.


A Confluence of Other Factors

Other factors are contributing to help smaller buyers. These include:

Attractive Financing Environment. Lenders are more educated these days on government services M&A and have become very comfortable with mid-tier buyers who can afford to transact deals.

Exploiting the "Law of Diminishing Returns for Large Buyers." As Tier 1 and Tier 2 federal services and system integrators firms grow larger, they are less likely to find truly strategic M&A fits in the small company pond, leaving more opportunity for modest-sized companies.

Financial buyers like the sector — and smaller firms. Private equity funds gravitate to mid-tier firms as their preferred platform in the federal sector, providing small and mid-sized companies the ability to maintain insider ownership while accelerating the growth of their firms organically and through M&A.


Understanding the M&A Path

So what can new-to-M&A acquirers expect once started down a dedicated acquisition path?

First, the company needs to appreciate the complexity of the undertaking, and the differences from the more comfortable contracting world. Even with a highly-vetted candidate target list and sufficient staff and external resources, acquirers are approaching companies they often do not know at the ownership level, with reliance largely on dated public data, the target's hype, or impressions drawn from the marketplace. Further, at any given time, the target is technically not for sale — and perhaps emphatically so.

To overcome this challenge, the buyer and its M&A advisors must convince the seller to put the company up for sale, to negotiate only with the buyer, and to complete a transaction where both the buyer and seller are new to the process. While having done a deal or two is very helpful, similar challenges are faced by the slightly-experienced small and mid-tier companies.

One way to increase the odds of success is to approach existing subcontractors or prime contractors. As in any business relationship, the companies start off on common ground. This said, the dynamics often quickly change — as discussions shift to valuation, terms and risks associated with M&A.

To the extent that the suitor is not a household federal contractor name, credibility creeps into the mind of sellers. Can the buyer afford the transaction? Will they require me — and fellow owners — to take a large portion of the purchase price in contingent payouts? What do they know about completing and integrating acquisitions? What's the synergistic fit?


How to Succeed as a Federal M&A Acquirer

Federal sector M&A is very competitive — especially for top-flight candidates. Generally lacking the resources of the larger buyers, small and mid-size firms must arm themselves with as much corporate mindshare, financial resources, and M&A acumen as they can to be as successful in M&A as they are in proposal development, human capital management and contract execution. They should consider the following guidance:

  • Start with a Strategic and Capture Plan. Just as the firm would approach a major proposal or overture to a new customer, ensure that operational leads, corporate leadership and the board agree on the M&A "capture plan" and target company characteristics (e.g., size, customer profile, profitability).
  • Expand the Company Board. Consider adding one or more directors, especially those with a keen strategic sense, M&A experience and knowledge of the federal market. Once the M&A process is underway, keep the board appraised on progress.
  • Involve the Business Units. Draw on the expertise of business unit managers and business development executives to identify prospective targets. Your own personnel may know firms which operate under the radar of large acquirers.
  • Visit your Commercial Banker. Since most new acquirers have neither "usable" company stock nor sufficient internally generated cash to transact a deal, their lender becomes integral to the M&A process. Collaborate with your lending source in advance of approaching target candidates to understand the boundaries of affordable deal size and structure.
  • Have the Right Legal Counsel. M&A is a practice unto itself. Make sure your law firm has transacted several M&A deals, or else interview other firms that have.
  • Dedicated Staff Responsibility. At least one person on staff — with good financial and strategic sense and among the corporate decision makers — should spearhead the M&A effort.
  • Build the External M&A Team. External advisers, be they investment banks or M&A advisors, can augment internal resources by managing the M&A process, keeping the client focused on this effort, researching the market, winnowing the candidates, advising on value and structure and helping to direct the negotiations with the lead target.
  • Make your Intentions Known to the Market. In addition to informing the market at industry conclaves, educate investment banks of your firm's initiative and buying criteria.


Conclusion

The federal sector M&A landscape has changed. Small and mid- sized firms are successfully closing deals which previously were the province only of their larger competitors. So, when fielding a call the next time from a small or mid-sized company CEO, firm owners should be open to the unexpected!

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Minuteman Ventures LLC News

Kudos to Minuteman team member Joe Fitzgerald, who is winding up his two-year tour of duty serving as the 43rd President of the Redstone-Huntsville Chapter of the Association of the U.S. Army (AUSA). During Joe's tenure the Chapter was selected from among 130 Chapters worldwide to receive AUSA's "Best Chapter Award for 2004." The Chapter also captured AUSA's Third Region's Best Chapter Award for 2004 and 2005. The Redstone-Huntsville Chapter began such innovative programs as "Satellite Chapters;" "Every Soldier Gets Their Welcome Home;" "Job Fair;" First Annual "Homeland Security Conference;" "Post Traumatic Stress Disorder Seminars;" and "Armed Forces Day AUSA Family Picnic"… Minuteman President Paul Serotkin spoke June 3 at a conference titled "Phase 3 Business Matters: Realizing SBIR Value." His speech was called: "The Rush to Acquire — Analyzing the Robust M&A Market for Federal/ Technology Companies". To download a copy of the PowerPoint remarks, click hereMark your calendars for Sept. 25– 27 in Williamsburg, Va., the annual conference of the Professional Services Council. As always, leaders from small, mid-tier and large companies in the federal services industry will be there to debate and discuss issues affecting the sector. For more, click here.

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*Note

The Minuteman Federal Deal Meter covers M&A transactions of services firms principally serving federal agencies.

Transactions covered are those announced between January 1, 2005 through May 31, 2005.

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About Us

Minuteman Ventures LLC advises company owners on the sale of their businesses, and assists corporate and private equity buyers in strategic acquisitions and divestitures. Our team consists of experienced entrepreneurs and business executives who founded or operated companies and corporate divisions.

We specialize in companies that sell services and product solutions to federal government clients. We pride ourselves in being the investment bank for entrepreneurial companies in the federal sector.

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