Eric DeMarco, CEO, Kratos Defense and Security Solutions, Inc.

The name "Kratos" says it all.

Standing for the Greek God of Strength and Power, it is the corporate name adopted by Kratos Defense and Security Solutions, Inc. (NASD:KTOS), headquartered in San Diego. CEO Eric DeMarco, with a number of Titan Corp. compatriots (from whence he came), is leading the company through major transformation which is expected to be substantially complete by mid year. Once known as Wireless Facilities, Inc. (WFI), a large supplier of wireless network services, Kratos has very recently divested itself of the wireless assets and focused on DeMarco's clear strength — building a DoD services company, which he did at Titan, taking the Company from approximately $100 million in 1996, to approximately $1.5 billion in 2003.

He will be trying to reprise his role at Titan as a master consolidator in the DoD sector. We caught up recently with DeMarco.

DMA: Why such a massive transformation, totally redefining the company?
ED: When I joined WFI, the strategic plan laid out by the Board of Directors, was to build a company with two primary pillars — commercial wireless, and network applications for the U.S. government. Shortly after I arrived Cingular bought AT&T Wireless, Sprint acquired Nextel, and the consolidation of the wireless space began and accelerated. The wireless business soon became a commodity with limited margin upside.

DMA: How quickly did the company respond to market conditions?
ED: I believe that we moved into action quickly. What started as a diversification plan became a transformation plan. I liken it to a 747 in mid-flight switching out engines.

DMA: Kratos has grown rapidly in the federal sector. How did the company achieve that growth?
ED: We acquired our first Federal company, which was based in San Diego, (High Technology Solutions, Inc.) in 2004, which became the anchor business in the DoD sector. Since then we've acquired companies with about $240 million in revenue at the time of the transaction. Now under the Kratos banner, these businesses collectively are projecting over $300 million in 2008. The growth is primarily attributable to a great management team and clear and focused support by the Kratos Board of Directors. Given that we started in 2004 with zero federal revenue, I have been told that some describe us as the fastest growing DoD services pure-play in the last four years. Once again, this is truly attributed to the team that we have built here at Kratos, many of which were the true builders of Titan.

DMA: Kratos recently acquired Haverstick Consulting, Inc., which adds 50% in revenue to your company. What drove the deal? Why such a large acquisition relative to your size?
ED: Haverstick was exactly what we wanted. Literally just about all of their contracts are awarded on a "full and open" basis, which is a Kratos hallmark. Haverstick's President, Howard Bates, is clearly one of the best business executives I have had the pleasure of working with, and we both saw the benefits of combining the businesses so the merged company could successfully pursue large contracts in the prime role. Also, Kratos had previously acquired Madison Research Corp. in Huntsville, which had a similar contract profile, and just an outstanding management team. In summary, I would say that Haverstick deepened and diversified our business portfolio while helping Kratos gain superior past performance qualifications in the Key business areas we are targeting (critical in bidding on larger contracts.)

DMA: How has the market responded to this transaction?
ED: The reaction has been highly positive from the Equity market, Industry, and Employee stand point across the board. The merger with Haverstick clearly demonstrated that Kratos is stepping up as a major consolidator in the space, and that Kratos is able to do so at reasonable cost (under 10x trailing EBITDA). Analysts realize the importance of adding critical mass quickly in the key strategic focus areas of the business, i.e. being a rifle in focus and not a shot gun. Further, we arranged an outstanding bank financing vehicle, headed by KeyBank Securities, which our Chief Financial Officer, Deanna Lund, executed. In my opinion, it was just a phenomenal feat in an incredibly difficult debt market. One of the most significant aspects of our transformation activities has been the support we have received from the banks in these deals. This is a very competitive economic climate to secure financing, and the bank's commitment to Kratos is, we believe, a solid endorsement of our viability and long-term strategy. (ED: DeMarco lauded KeyBank's ability to commit to the capital raise in a difficult debt market.)

DMA: How should investors look at your business lines?
ED: With Haverstick aboard, we now have several offerings with some of the best past performance qualifications, customer relationships and employee resumes in the industry, focused on growing areas of the DoD budget. Our two lead services — extending the lifecycle for legacy weapons systems, and operations and technical services for military weapons and targets ranges — have very favorable characteristics. Both see little competition in the space, strengthening the position of subject matters experts like ourselves. This is something that we are all extremely excited about here at Kratos.

Also, one of the more promising areas is that of target rockets used to test ballistic missile defense weaponry. We have exclusive rights to the Oriole Rocket system, a supersonic "sounding" rocket, and an initial order to deliver 18 Haverstick Oriole Rockets in 2008. This brings Kratos into markets that we feel are very attractive, which we can leverage, and which have great margin potential due to the nature of the contract vehicles and the exclusivity of the system.

DMA: Given the growing number of consolidators in this sector and the slowed DoD budget, what growth pattern can we expect from Kratos?
ED: Yes, the number of companies attempting to be successful consolidators in this industry is clearly growing. Kratos has been growing organically at approximately 10% p.a. and expects to be in the 5–10% rate going forward. The management team here is well steeped in M&A; we're confident that the company can grow externally by 15–20% per year. It adds to anticipated top line growth in the 20–25% range annually.

DMA: Compared to your successes in building and growing Titan (ED: Eric's tenure there was from 1996 to 2003), how challenged is the market for federal consolidators who desire to quickly (and liberally) use M&A?
ED: Many factors are different now, and in my opinion, they present greater hurdles to accelerated growth. For instance, the SBA rule change last year makes it harder for larger companies to successfully acquire firms with small business or other types of set aside contracts.

Additionally, the tight labor market for cleared personnel at the secret and up level is causing issues related to filling billets. Also, the supply of solid, qualified and well rounded sell-side acquisition candidates is far less, while the demand for these companies is greater.

Finally, from a pricing standpoint, many business owners have "stars in their eyes" from a valuation perspective, which makes generating true value for your shareholder base more challenging, and the art of executing a successful acquisition more risky.

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This article was written by Michael Lent, publisher of Government Services Insider, an independent source of insight and commentary on the professional and IT services firms that serve the federal government. Now in its fifth year of publication in January, the Insider focuses on successful business strategies, lessons learned, best practices and critical inputs to thinking through improvements in business management and development. Contact: www.gsinsider.com or editor@gsinsider.com or 202.237.0765 for subscriptions or other information.

Booz Allen-Carlyle Group: The Buy-in Deal Goes On

While both privately held firms remain mum, there is ample evidence that the deal-making goes on between venerable consultant/contractor Booz Allen Hamilton and the Carlyle Group, one of the top private equity firms.

The emerging deal is attracting lots of attention in the industry because of the recent dip in large M&A transactions, the small presence of PE firms in the government services arena, as well as the mystique about Booz Allen's government business, which is in the $3.5-4.0 billion revenue range.

Publicly, the Booz Allen press spokeswomen, while not referring to Carlyle or a deal, has referred in a public statement to "tension" between the government and commercial businesses of Booz Allen. Also, and with circumspection, Ralph Shrader, Booz Allen CEO, told the firm's alumni last month that the firm is:

For the full article, click here

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Closing/ Announcement Date	Buyer	Seller	Purchase Price	Seller Revenue
2008
February 12, 2008	Technology Service Corporation	MagnaCom, Inc.	N/D	N/D
January 24, 2008	ICF International	Jones & Stokes Associates	$50m	$72m
January 22, 2008	QinetiQ Group	Pinnacle CSI	$6m	$14m
January 18, 2008	The Amey Group, Inc.	Amyx, Inc.	N/D	N/D
January 16, 2008	Cobham plc	Sparta, Inc.	$416m max	$297.3m
January 14, 2008	AECOM Technology Corp.	The Services Group	N/D	400+ employees
January 3, 2008	VT Group	Advanced Engineering and Planning Corp (AEPCO)	$70m	N/D
January 2, 2008	White Oak Group, Inc.	EOIR Technologies, Inc.	$34m (max.)	N/D
January 2, 2008	QinetiQ Group	Novare Services Pty Ltd	$7m	$5.4m
January 2, 2008	WidePoint Corporation	iSYS LLLC	N/D	$18m+
2007
December 24, 2007	BAE Systems	MTC Technologies	$450m	$415.5m

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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.

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