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Volume 4, Issue 3 August 2006

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
 
Jointness, Intel, Homeland Themes Dominate Federal M&A - The federal M&A market continues to reflect the underlying global events swirling about it.
The Federal Deal - Wireless Facilities, Inc. Acquires Madison Research Corp.
Daily Deals - Check out the latest sector M&A deals

Minuteman Ventures LLC partners with InfoBase Publishers, Inc., to bring you expert analysis of recent federal M&A transactions. Click here for their analysis of a recent transaction. InfoBase is a provider of information on buyers and sellers of the global defense, aerospace, and government technology marketplaces. Their "Defense Mergers and Acquisitions" newsletter is an executive summary of each month's M&A news and analysis, and is widely considered the industry's most important strategic read. For more on DM&A and how it fits within InfoBase Publishers' web-based Defense/Aerospace Competitive Intelligence Service (DACIS), visit www.dacis.com or contact Bill Burton (wkburton@dacis.com) (410.820.6821) for a personal tour.


The Minuteman Federal Deal Meter
  Purchase price  
  Under $50m $50–100m Over $100m Total Deals
YTD 2005 34 6 8 48
YTD 2006 34 10 6 50

The Minuteman Federal Deal Meter covers M&A transactions of services firms principally serving federal agencies. Transactions covered are those announced from January 1 through August 16 of 2005 and 2006.

For the list of M&A transactions closed in the sector since January 1, 2005, email paulserotkin@minutemanventures.com.


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, products, and solutions to federal government clients. We pride ourselves in being the investment bank for entrepreneurial companies in the federal sector.


Jointness, Intel, Homeland Themes Dominate Federal M&A

The federal M&A market continues to reflect the underlying global events swirling about it.

Recent transactions in the sector centered on three themes: jointness, intelligence, and homeland security.

Nine deals were announced since the last issue of the Federal Growth Report.

In three, large companies (Teledyne, SAIC, Raytheon) acquired businesses under $20 million that provide services in joint doctrine and joint operations. The push toward integrated operations and policy among the services in prosecuting military campaigns induced the purchase of these joint-savvy suppliers, respectively, CollaborX, Cornerstone Industry and Virtual Technology.

With the averted UK air threat as backdrop, Kroll, Compudyne and EDO Corporation all acquired companies with pronounced intelligence and homeland security practices — Homeland Solutions, Signami and Impact Science and Technology (IST), respectively.

The other current running through recent federal M&A was that of 'Huntsville' — home to CAS and MRC. The Huntsville area benefited from recent decisions under the BRAC, reinforcing the area as a defense-friendly region. Predictably, buyers have accelerated the acquisition pace of firms headquartered there.

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The Federal Deal

FGR offers analysis of M&A transactions 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@dacis.com).


Wireless Facilities, Inc. Acquires Madison Research Corporation

It's been nine months since the Base Realignment and Closures (BRAC) Commission Report to the President was released last November. That report represented bad news for many communities across the country, but not for the Huntsville, Alabama metropolitan area. As a result of the BRAC process, Huntsville is projected to gain 2,925 jobs.

In the context of the military-space megalopolis that is Huntsville, those 2,925 jobs represent a gain of only 1.2% in the context of total industry employment of more than 225,000 jobs. But an outsized proportion of those gains are coming from civilian (read: NASA) and contractor employment. Military employment is actually expected to fall by nearly 1,000 jobs. The bottom line: it's a good time to be one of Huntsville's many, many technical and engineering services contractors.

Readers of this service, with their keen instinct for the bottom line, have taken note of the good news contained in the BRAC and have been having a field day bagging acquisition candidates in Huntsville's sprawling contractor community. There have been four major acquisitions in Huntsville since the BRAC report hit the street: Ducommon's $50 million purchase of Miltec Corp. in January, Stanley Associates' $50 million buy of Morgan Research Corp. in February, EDO's $175 million buy of CAS, Inc. in July, and now the $69 million purchase on the part of WFI. With four months remaining in 2006, the year is already the most active for Huntsville companies in the history of this service (as measured by volume of deals; 2003, with the $543 million acquisition of Integrated Defense Technologies, remains the biggest year as measured by money spent).

The acquisition of Madison Research is the fourth deal by WFI, a company headed by Titan Corp. alum Eric DeMarco. Since hiring on with WFI in 2003, Mr. DeMarco has plunged the commercial wireless provider into the federal marketplace, a decision that has provided the company with the sole silver lining in a darkening financial picture. The company's stock has plunged from a high of $18.44 in January 2004 to only $2.29 on the day before the Madison Research deal was announced. In the three days after the announcement of the Madison Research deal, shares declined a further 20 cents, or nearly nine percent.

The current drop in the stock isn't due to the acquisition, however — it's due to the red ink which the company reported on the same day. For the first half of 2006 the company's Government Network Services (GNS) business reported revenues of $41.0 million and operating income of $3.9 million. The bottom line was taken into negative territory by large operating losses in both of the company's other two commercial segments, however — and that goes a long way towards explaining the decision to buy Madison Research.

This is an extremely conservative deal. It upends the guidance given by Eric DeMarco two years ago in an interview with this service (appearing in the April 2004 issue of DM&A). At that time Mr. DeMarco said that WFI's federal acquisitions filters were closely aligned with the company's commercial business — i.e., WFI was looking to acquire federal contractors involved in RFID, wireless sensors and networks, and spectrum management. And the company's three federal deals did indeed fall within those parameters.

But now comes the Madison Research deal — and if the acquired company is involved in anything wireless, it's keeping the information closely held. Madison Research is a typical Huntsville contractor — a provider of technical, engineering and information technology solutions to AMCOM, SMDC, PEO Missiles and Space, PEO Aviation, NASA Marshall, etc. This acquisition is less about inserting WFI's technology into the federal marketplace than it's about inserting MRC's steady profitability and revenues into a buyer which is in sore need of steadiness right now. The fact that it brings the company's customer base (hitherto heavily skewed towards Navy work) into balance with Army and NASA contracts is a nice bonus.

Going forward, we look for further deals like this one from WFI (each of the customers it is gaining will be in some stage of wireless implementations). The only thing holding it back will be its ability to convince lenders like KeyBanc to finance further government buys. If the candidates are like Madison Research, we doubt it will have much trouble doing so. Looking beyond the BRAC, recent developments in North Korea and Lebanon have underscored the need to continue making progress in missile defense. For Huntsville, missile defense capital of the Western world, that means the good times will just keep rolling.

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Daily Deals

Closing/
announcement date
Buyer Seller Purchase Price Seller Revenue
August 7, 2006 Wireless Facilities Madison Research Corp. $69m $60m
August 7, 2006 Teledyne Technologies CollaborX $17.5m $13.6m
August 4, 2006 SAIC Cornerstone Industry N/D $9m
August 1, 2006 SAIC bd Systems N/D $39m
July 27, 2006 EDO Corporation CAS, Inc. $175.6m $184.3m
July 27, 2006 EDO Corporation Impact Science and Technology $113m $63m
July 24, 2006 Compudyne Signami LLC N/D N/D
July 20, 2006 Kroll, Inc. Homeland Solution LLC N/D N/D
July 5, 2006 Raytheon Virtual Technology Company N/D $18m

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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, products, and solutions to federal government clients. We pride ourselves in being the investment bank for entrepreneurial companies in the federal sector.

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