Who's your public buyer?

Acquisition experts Marc Marlin and Kate Troendle continue their four-part series that examines who is driving the resurgence in government market M&A. Here in part two, they look at why the public companies have become "somewhat of a unicorn" in the buyer universe.

Last week, we touched upon various private equity buying trends. This week, we explore buying trends associated with public companies.

Public government and technology services company valuation multiples are at historically high levels that currently average 14x LTM EBITDA. Combined with an attractive federal budget outlook and strong company backlog and balance sheets, public companies have substantially increased their appetite for M&A. Public buyers are currently focused on acquisitions that add scale, as well as in-demand capabilities, contracts, and/or customers.

To get excited about a potential acquisition, public buyers want to clearly understand how a target company can unlock significant revenue and earnings potential over a three-to-five year period. This is what we often refer to as a “third” waterfall or pipeline, which is essentially when a buyer can productively pursue and win new opportunities because of acquired talent, capabilities, contracts, customer access, and/or past performance.

Given abundant access to capital, the potential for meaningful cost and revenue synergies, and opportunities for instant value arbitrage or share price accretion (by acquiring a business for less than a buyer’s public trading multiple, often having adjusted the target financials for the aforementioned synergies), public companies are well positioned to pay outlier multiples for desirable businesses that unlock meaningful growth opportunities.

That said, public companies have become highly selective when making acquisitions and typically only “pay up” for “best-in-class” assets. As a result, the public buyer has become the exception rather than the norm.

Given current selectivity, public companies were the buyers in slightly more than 20% of all announced GTS transactions since 2017, compared to approximately 35% in 2015. Of the last 35 acquisitions by public GTS companies, nearly half were greater than $100 million in enterprise value or revenue, which is largely in line with historical averages, but also supports the trend of the “big getting bigger.” Larger companies need larger transactions to make an immediate impact.

Recent public company purchases include: General Dynamics’ highly public and nearly $10 billion acquisition of CSRA; ASGN’s entry into the GTS marketplace with its nearly $800 million purchase of ECS Federal; and SAIC’s recently announced $2.5 billion acquisition of Engility.

One trend that has remained constant over the last several years is minimal foreign company appetite for U.S.-based government businesses, a trend that was more popular in the mid-2000s. Foreign companies represented the buyers in slightly less than 8% of all GTS transactions since 2017, which represents a slight increase from approximately 5% in 2015 and 2016.

Most notably this year, Serco made its first U.S. acquisition in 10 years, with its purchase of BTP Systems; and SAP National Security Services made its third intell-focused acquisition, picking up Technology Management Associates to further expand its presence within the Intelligence Community.

While the public company buyer is often the expectation or desired buyer for a well-positioned seller in the GTS marketplace, they have become somewhat of a unicorn as they have become increasingly selective. Come back next week for our article discussing “nontraditional” GTS buyer habits.