The top two deals on this year’s roundup of mergers and acquisitions offer the best snapshots of the types of buyers active in today’s market.

Leonard Green and Partners LLP’s acquisition of Scitor Corp. represents the deep-pocketed financial buyer looking for an investment platform in the government services market, and Northrop Grumman Corp.’s acquisition of Essex Corp. embodies the established strategic buyer looking to build market share and gain access to growing niches in the government.

The Scitor and Essex transactions are just two of the 99 acquisitions that closed in the government services market during 2007. That compares to 84 in 2006 and 100 in 2005. Investment bank Houlihan Lokey Howard and Zukin Inc. compiled the roundup for Washington Technology as it has each year since 2004, when 106 transactions closed. A panel of M&A experts then picked the top 10 deals.

Financial buyers in this year’s roundup include familiar private-equity groups, such as the Carlyle Group and Veritas Capital, and new players, such as D.C. Capital Partners. They see the government market as an attractive investment because of its stability and steady cash flow.

For strategic buyers — including, in addition to Northrop Grumman, a virtual who’s who of the government contracting world — acquisitions have emerged as a critical means for keeping up with changes in the marketplace. Acquisitions represent a way to reach new customers and contracts in addition to following changes in government priorities.

For example, NCI Inc., of Reston, Va., acquired Karta Technologies Inc., of San Antonio, to position itself for changes in the coming years from base realignment and closure (BRAC) activities.

“We felt there were places like Huntsville, Ala.; San Antonio; and Colorado Springs, Colo., where the military presence will grow as a result of base closings elsewhere,” said Terry Glasgow, president and chief operating officer at NCI.

A command position
Northrop Grumman wasn’t afraid to pay top dollar for Essex because it knew the company had a strong position in the lucrative and hard-to-crack C4ISR market, which stands for command, control, communications, computers, intelligence, surveillance and reconnaissance.

The company paid $580 million for Essex, which in its last guidance to Wall Street in 2006 projected its revenue that year would approach $300 million.

“This is just another opportunity to invest in a company that has already proven to be a success,” Northrop Grumman spokesman Dan McClain said.

Columbia, Md.-based Essex, a provider of optoelectronic imaging and signal-processing services and products to the intelligence community and defense agencies, had boosted its value earlier by making some acquisitions of its own before being snapped up by Northrop Grumman in January 2007.

In 2005, Essex paid almost $70 million for Windermere Group LLC, an Annapolis, Md., software and engineering firm with extensive government contracts. It then paid $40.3 million in 2006 for Adaptive Optics Associates Inc., of Cambridge, Mass., a manufacturer of complex optical products.

“We viewed their strengths in the areas of signal processing, information assurance, optics and optical processing, and systems engineering and integration as a significant complement to our work supporting the intelligence community and the Defense Department,” McClain said.

Plan ahead
TechTeam Government Solutions Inc., a subsidiary of TechTeam Global Inc., which made two purchases in 2007, is another example of a strategic buyer.

The Chantilly, Va., company acquired NewVectors LLC, a provider of advanced research, analysis and consulting services, in May for $40.8 million. Three months later, TechTeam GS bought RL Phillips Inc., a small provider of government information technology, network engineering and information assurance services.

The acquisitions were the result of strategic planning to broaden and improve the company’s offerings, said Dennis Kelly Jr., president of TechTeam GS. “During 2006 and 2007, we literally looked at dozens of deals, and these opportunities were ones that [stood out] and were very specific to our strategy.”

RL Phillips’ attraction was its expertise in information assurance, Kelly said. The company integrates security solutions for clients including the National Security Agency, Navy and Marine Corps.

“The skill sets that they have are very marketable, in high demand and ... very hard to find,” Kelly said.

NewVectors’ expertise includes business transformation, logistics modernization, and modeling and simulation services primarily for DOD. It also provides supply chain engineering, acquisition support, agent-based complex systems and change management.

“NewVectors provided us with what I would call the more front-end strategic thought leadership part of enterprise systems development,” Kelly said.

New Vectors was deep into the defense logistics market, “which was a market we wanted to be in,” he said, because it is expected to grow faster than any other defense area.

Follow the customer
IT solutions and services provider NCI made two acquisitions in 2007 to expand its reach, especially into the civilian and health care markets.

Both transactions were strategic acquisitions that NCI sought to meet its organic growth goals, Glasgow said.

In February, the company bought Operational Technologies Services Inc., a provider of engineering and professional services with revenues less than $10 million and fewer than 100 employees. OTS’ major client was the Federal Aviation Administration, an agency NCI was targeting.

“Part of our long-term strategy, obviously, is to have breadth and depth in all of our customer areas, and they bring us access there to people who really understand the FAA,” Glasgow said.

The Karta acquisition targeted BRAC activities. “We felt we needed to have a strong presence… either through winning new business, strategic growth or in selective situations, if we could find the right companies through acquisitions,” he said.

Karta is strong in medical systems infrastructure and transformation services, especially with the Air Force, Glasgow said. “When combined with some of the things we have in the Army health care area, it gives us a really strong presence.”

Karta brought along three governmentwide acquisition contract vehicles, he said, including the Air Force Design and Engineering Support- 2 contract. “That’s a $1.9 billion GWAC, and Karta is one of only six or seven primes on it.”

“What really made this work is that the fundamental philosophies of both companies were basically the same,” he said. “It was a fit culturally, it was a fit business-wise, and it was a fit strategically.”

Eye on the niches
ICF International Inc. started its 2007 buying spree in January, when it made Energy and Environmental Analytics Inc., a small energy market consulting firm in Arlington, Va., the first of its four acquisitions. Three more deals followed targeting health care, human capital and transportation.

ICF bought Advanced Performance Consulting Group Inc., a woman-owned firm in Washington with about 30 employees, to supplement its government consulting work in human capital and organizational services, said Doug Beck, director of corporate development at ICF. “The federal government as a client base is traditionally about 80 percent of our work,” he said.

Advanced Performance brought clients at DOD, the Defense Information Systems Agency, the National Institutes of Health, and the Homeland Security and Treasury departments.

ICF paid $35 million in June for Z-Tech Corp., a 200-employee company that combines software engineering with expertise in health issues. The company is now a unit within ICF’s health care line of business, said Alan Stewart, ICF’s chief financial officer.

The deal boosted ICF’s health care offerings by combining IT expertise with substantive scientific knowledge.

ICF capped the year in December by purchasing Simat, Helliesen and Eichner Inc., a large transport consulting firm, to enlarge its transportation consulting line of business.

“We’ve got a sizable credit facility with our banking group,” Stewart said. “We were able to leverage [the four deals] off our revolver [line of credit]. It’s all debt-financed.”

A new player
Closing five deals in less than six months brought plenty of attention to D.C. Capital Partners and the company it formed to make those acquisitions, National Interest Security Co. Under the leadership of Thomas Campbell, chairman of NISC and president of D.C. Capital, the slew of deals landed the company at No. 4 on the list of the top 10 deals of the year.

The company was formed with the July 25 acquisition of three firms — the Intelligence Services Division of GAITS, Technology and Management Services Inc. and Omen Inc. It followed with Information Manufacturing Corp. and Athenyx Inc. Dec. 11.

“We’re looking to build a government services platform with two verticals — technology management consulting and information management,” Campbell said. A sixth acquisition is pending, and D.C. Capital expects to launch another platform company in the training and logistics space.

When the sixth deal for NISC closes, the company should have about $160 million in 2008 revenue. Campbell has brought in government veterans Andrew Maner as chief executive officer and James Van Dusen as CFO.

Maner most recently was president of ABM LLC, a strategic advisory firm, and CFO at DHS from 2004 through 2006. Van Dusen has been a senior executive at Titan Corp. and CFO at L-3 Government Services.

Their goal will be to make NISC’s various parts, which will remain independent operating units, work together to fuel organic growth, Campbell said.

“Under their leadership and with the operating companies’ presidents, they can grow the company to $350 million in revenue in the next two to three years,” he said.

Already sounding like a strategic buyer, Campbell said the executives look for acquisitions they can build on rather than chasing the whims of the market.

“Our perspective is long term, and we see a tremendous amount of opportunity,” he said. “But we stick to the basics. We’re kind of boring.”

David Hubler (dhubler@1105govinfo.com) is an associate editor and Nick Wakeman (nwakeman@ 1105govinfo.com) is editor-in-chief at Washington Technology.