Private equity investors are attracted to companies as target platform acquisitions that have the sufficient size, management talent, and infrastructure to support the critical mass necessary to achieve arbitrage available through increased scale. In addition, the rate of growth, profitability and customer base and how they are perceived by investors are important factors to consider. Finally, the capabilities of the management team and its commitment to the execution of plan which will enhance the growth of the firm are other important considerations.
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“In my opinion, DynCorp has always been a tough public stock,” says Joseph Vafi, a stock analyst covering defense contractors at Jeffries & Co. “A lot of what they do carries a lot of headline risk with it.
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I don’t usually talk about the money stuff in this industry, because it is out of my lane. But I want to understand it, and emphasize what matters to our industry. If in fact a company wants to be attractive to investors, they need to pay attention to what those investors are looking for in a company. With our industry, headline risk is a factor that can make or break a company. Customer service and satisfaction can make a or break a company as well. To me, it is the guy on the ground, and his leadership, who matters most when it comes to preventing headline worthy incidents or preventing poor customer service. So in this case, taking care of your people is pretty damned important–if you want to be attractive to investors.
The guy on the ground is what I like to focus on here at the blog, and any time I can convince a company to make the necessary investments into their people, I am happy. The individual on the ground, with the gun in his hand and fulfilling that contract in a war zone, can make or break that company. It is so important that a company do all they can to insure that contractor is happy and has guidance. Because the opposite of that, is an individual that can sabotage your company purely because they feel the company has wronged them or could care less about them. Worse yet, if the company has not done the necessary things to insure quality management at all levels, and sound policy implementation at all levels, then that can further erode the desire of an employee/contractor to do well.
In other words, customer service and satisfaction is highly dependent on how your people perform out there and how they feel they are being treated.
Your leadership needs to be treated well too. They should be well compensated, well supported, and given plenty of guidance. Because those are the guys who will either work hard to make their team shine, or fail miserably by not really caring what his people are doing. So with both cases, a company must care for both the management and work force out in the field.
Here is a metaphor for what I am talking about. In this war, there is a lot of effort and talk about not creating more insurgents in a village through violent or repulsive actions. When we accidently bomb a village and kill innocents, or go back on promises made to that village, or do actions that are offensive to that local population, we create people that hate us. They will work against us in all manner, either by joining the insurgency or helping the insurgency in little ways. We could create a hatred in someone that lasts a life time, and that someone will tell everyone about how they were wronged–for a life time. Some of these folks will even recruit people into their hatred campaign, and the damage will just keep perpetuating. Is your company creating insurgents in the work place? That is the point.
If a contractor felt they were wronged by a company, they could become like the villager turned insurgent. These folks will not care to do a good job, they will tell others how terrible the company is, and they will not care about the property of the company. And because most guys need to work in order to feed a family and pay bills, they will do just enough to stay with the company, but not care to do well for the company. Oh, and any guesses about how this individual will impact customer service and satisfaction?
Worse yet, their drive to not care could translate into an incident that actually requires them to care. Incidents where if that individual who has a gun, is tasked with a critical job in a convoy operation or static security, and now they are pissed off–will this askew their decision making ability for shoot/no shoot situations? War zones are stressful enough, and companies should do all they can to minimize undo stress upon their contractors/employees. Companies should ask, ‘will our actions and policies, create insurgents within my company’? Something to ponder if you want to make your company more appealing to investors. –Matt
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Private Equity – The Fuel of Industry Consolidation
Philip McMann
Thursday, May 6, 2010
Private equity firms have left an indelible mark on the Defense and Government Technology Services (GTS) markets. The investments made by private equity funds in the industry have spawned many of the premier public companies, including Anteon, SI International and Veridian. Once dominated by the activity of a few giants such as the Carlyle Group, Frontenac, and GTCR Golder Rauner, the number of private equity firms that are active acquirers today has increased dramatically. Private equity funds now account for a significant share of the M&A transactions. In 2005, approximately 20% of the 85 M&A transactions in the GTS market were completed by either private equity funds directly or the platform companies within their portfolios. A wide array of private equity players have emerged as buyers including Arlington Capital, Veritas Capital, The Edgewater Funds, New Mountain Capital, Littlejohn and Company, and Riordan, Lewis and Hayden. While Veritas Capital has been an active acquirer of defense hardware companies since the early 1990’s, they recently turned their attention to the large and rapidly growing technical and professional services markets with their recent acquisitions of DynCorp International, McNeil Technologies, The Wornick Company and the assets of MZM, Inc, which they renamed Athena Innovative Solutions.
There are several factors that have attracted private equity firms to the industry. Despite years of industry consolidation, the Defense and GTS markets remain highly fragmented. There are several thousand government contractors with revenues of less than $100 million. Many of these firms are quality companies with strong management teams and unique technology capabilities but lack the scale and access to capital to reach “the next level”. In addition, the government’s aging workforce and increasing reliance on outsourcing its IT and administrative support functions has increased the demand for these firms’ services. Private equity firms have seized on this opportunity by providing a critical role in the development of the companies they acquirer.
Private equity firms can create value by providing advice to portfolio companies on strategic direction and growth initiatives. The best fund managers will also provide guidance on operational enhancements to increase shareholder value. However, the primary services private equity funds provide to their portfolio companies is to identify acquisition targets, perform related due diligence on these companies, and source debt and equity capital at terms that could not be replicated by the portfolio companies themselves. These funds also play an integral role in managing the final liquidity event whether it is realized through an initial public offering (“IPO”) or sale to a strategic buyer. A great illustration of the role of private equity can play in industry consolidation and valuation creation can be seen in Caxton-Iseman’s 1996 buyout of Ogden’s professional services unit, which formed Anteon Corporation. Upon its acquisition of Anteon, the New-York based private equity firm appointed Joseph Kampf to be the CEO of the company. During his 10-year stewardship, Anteon was transformed into a premier IT solutions provider to national defense, intelligence and homeland security communities. Through a series of nine targeted acquisitions following Caxton’s initial $32 million equity investment, Anteon’s revenues grew from $100 million to over $1.5 billion from 1996 to 2005. In December 2002, the $2.2 billion acquisition of Anteon by General Dynamics was announced. Caxton-Iseman was rewarded by realizing a 23-fold gain on its investment.
With the heightened activity by private equity firms, the distinction between financial buyers and strategic buyers has become increasingly more difficult to discern. The most active private equity sponsors in the industry have assembled investment staffs and senior advisory boards that are dedicated solely to the Defense and GTS markets. These professionals have a wealth of industry experience and deep ties to the community providing invaluable insight and access to government decision makers which benefit the companies within their portfolio. The largest private equity funds have developed deep industry-focused portfolios comprised of platform companies that often provide complementary services. The advantage of this approach can be brought to bear on large procurement opportunities requiring a broader set of capabilities and critical mass than can be provided by the individual firms. This strategy has encouraged private equity to make acquisitions at premium valuations for well positioned companies.
A control sale to a private equity firm continues to be an attractive option for owners of middle market private Defense and GTS companies who remain optimistic about the future prospects of their business but want to achieve substantial liquidity under favorable market conditions. Typically in platform transactions, the target company is acquired by the private equity firm and the owners of the selling corporation reinvest a portion (10% to 20%) of the sale proceeds in the recapitalized entity. The owners usually remain actively involved in the day-to-day operations of the company after the change of control occurs. The selling shareholders equity stake in the business is enhanced through subsequent follow-on acquisitions that are funded through debt that is usually provided by institutional sources and additional equity infused by the private equity sponsor. As demonstrated in the Anteon illustration, the leveraged return to investors in private equity buyouts can be dramatic. In addition, to getting a “second bite at the apple” that is not typically available in a sale to a strategic buyer, owners of middle market Defense and GTS companies can share with their senior management and other key employees in the company’s appreciation in value through stock options or other equity incentives. Private equity firms want the interests of the senior management teams of their portfolio companies to be aligned with their interests and are willing to reward them for creating value during their investment horizon.
Private equity control transactions can be very attractive to owners of government contractors but are not for everyone. In contemplating this form of transaction careful consideration should be given to the attributes of the company. Private equity investors are attracted to companies as target platform acquisitions that have the sufficient size, management talent, and infrastructure to support the critical mass necessary to achieve arbitrage available through increased scale. In addition, the rate of growth, profitability and customer base and how they are perceived by investors are important factors to consider. Finally, the capabilities of the management team and its commitment to the execution of plan which will enhance the growth of the firm are other important considerations. If you are interested in learning more about the specifics of a private equity control transaction and whether it is a realistic option for your company do not hesitate to contact us.
Philip McMann is a Managing Director with Aronson Capital Partners (ACP), a leading investment bank providing M&A advisory and corporate finance services to middle market government technology and professional services companies. While at ACP, he has completed over 15 sell-side strategic and financial M&A transactions in the industry. Prior to joining ACP, he was a finance executive with a Goldman Sachs-sponsored private equity fund and vice president of Structured Finance at a NYSE-traded corporation. Mr. McMann received an MBA from Cornell University’s Johnson Graduate School of Management and a BS from Tulane University.
Story here.
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DynCorp Ends Public Experiment
Scott Eden
04/13/10 – 12:36 PM EDT
FALLS CHURCH, Va. — DynCorp International’s(DCP) agreement to sell itself to Cerberus, the private-equity firm, for $1.5 billion, ends an uneven and ultimately unsuccessful experiment in operating a controversial government security-services contractor as a publicly traded entity.
As the arbs poured in during Monday’s frantic regular session and drove DynCorp shares toward the offer price — at $17.55 in cash, it was a 49% premium over the stock’s closing price Friday — company executives, and its biggest shareholder, Veritas Capital, must have been congratulating themselves inside their Beltway corporate compound.
Veritas, another big private-equity shop, bought DynCorp for $937 million five years ago and then took it public in May 2006 in the midst of a boom in LBOs and public-market exits. The shares priced at $15 (and Veritas paid itself a quick post-IPO dividend of $100 million).
But despite decent growth for DynCorp during those years — its revenue rose nearly 50% between 2007 and 2009 — the stock hasn’t done much since it reached its all-time high near $27 back in late 2007.
“In my opinion, DynCorp has always been a tough public stock,” says Joseph Vafi, a stock analyst covering defense contractors at Jeffries & Co. “A lot of what they do carries a lot of headline risk with it.”
That’s one way of putting it. Perhaps DynCorp’s most contentions business is training security forces in Iraq and Afghanistan and providing protection to U.S. diplomats and other VIPs traveling through war zones and other dangerous regions. Indeed, the company has essentially two clients: the Department of Defense and the Department of State.
The company’s work in Iraq and Afghanistan has drawn criticism not only about the effectiveness of those services, but whether they have led to the deaths of civilians and DynCorp employees alike. Most recently, the deaths of two DynCorp contractors in Afghanistan have sparked a scandal, as they appear to have been drug related.
Now, however, DynCorp can operate without the need to file pesky regulatory filings, along with fellow private security contractor, Xe Services, formerly known as Blackwater. Several DynCorp rivals remain public, but those concerns are much larger and focus more on construction and engineering services — such as Fluor(FLR) and KBR(KBR) — rather than the more martial offerings of DynCorp.
One group has made out well over the last half decade: Veritas, of course, which will receive about $350 million for its 35% of DynCorp common stock, if the deal goes through. The buyout agreement contains a go-shop provision, which allows DynCorp to seek a competing bid for the next 28 days.
At least three law firms issued press releases Monday announcing investigations into the deal, apparently in preparation for class-action shareholder suits.
For its part, Cerberus, which has been licking its wounds ever since its buyout of Chrysler ended in catastrophe, will use financing from a slew of bulge bracket firms — Bank of America Merrill Lynch, Citigroup, Barclays and Deutsche Bank — another indication that capital markets for private-equity sponsors continue to unfreeze.
DynCorp shares ended trading Monday at $17.41, up $5.66, or 48%. Volume reached 37.4 million shares, more than 70 times the daily average turnover in the name.
Story here.