B2G Blog - Mergers & Acquisitions

Contractor Survival Tactics: Booz Allen Makes C4ISR Acquisition, Expands Into Commercial Cyber

Thu, 25 Oct 2012 12:19:00 -0400

In today’s challenging federal market, contractors of all sizes are evaluating their current strategies to achieve success over the next several years, while bracing for potential budget cuts that could significantly impact the way they do business moving forward.

At FIA, we are always keeping tabs on what’s going on in the federal market, and I recently noticed that consulting firm Booz Allen Hamilton is making some interesting moves in order to remain competitive and continue its success in today’s evolving government market.

In fiscal 2012, Booz Allen derived 98% of its revenue from services provided to more than 1,200 client organizations across the U.S. government under more than 5,800 contracts and task orders.

FIA Perspective:

Booz continues to look for “opportunistic” acquisitions. Last week, Booz Allen agreed to acquire the Defense Systems Engineering & Support (DSES) division of ARINC for $154 million. This acquisition will bring strong capabilities in advanced aviation and maritime engineering, advanced weapons modernization and sustainment, and advanced systems engineering and integration to complement Booz Allen’s existing services, which span engineering and operations, technology, analytics, and strategy and organization. DSES is well-positioned in the growing C4ISR and engineering services/prototyping segments of the defense market, and Booz sees opportunities for these capabilities in adjacent intelligence, law enforcement, homeland security, and international systems sectors.

Taking a look at its acquisition strategy, Booz said it’s seeing consolidation in the market, and is “open to evaluating potential opportunities” with a focus on companies that are a cultural fit that will bring additional client access or enhanced capabilities. It also said it would “pursue inorganic growth options ideally in the $100 to $200 million range.”

Booz continues to win significant contracts despite tightening market conditions. In terms of contracts, Booz Allen was recently one of 12 vendors who won a $7 billion Army contract for software and engineering services. In August, Booz was also one of five contractors to receive an Army award (with a $489 million ceiling) to manage chemical weapons. In addition, Booz said it won 35 healthcare contracts, totaling more than $112 million, in August and September timeframe to support a wide range of federal healthcare agencies and private organizations.

In its fiscal first quarter, Booz Allen also won a series of major awards totaling over $300 million to support the U.S. Navy Space and Naval Warfare Systems Command in areas such as cyber, intelligence systems, infrastructure protection, and C4I. Booz also added an IDIQ contract with a ceiling of $20 billion from the National Institute of Health for services and solutions with the Chief Information Office, and a $73 million contract from the Department of Energy to provide scientific, engineering, and technical support.

For fiscal 2012, Booz said it achieved an overall win rate of 55% on new contracts and task orders that it pursued, and a win rate of more than 91% on re-competed contracts and task orders for existing or related business.

Booz Allen looking for commercial opportunities in cyber security. While cybersecurity is one of the federal market’sfew bright spots in terms of spending,Booz Allen is aiming to use its federal cyber expertise as a bridge to commercial opportunities in the field, according to a recent Washington Post article.

Currently, Booz is one of a handful of contractors looking to make the transition to the commercial sector to expand its addressable market in cyber. Other firms seeking to make this jump include KEYW Holdings Corp., ManTech International, SAIC and Computer Sciences Corp., according to the article.

As part of its foray into the commercial market, Booz Allen recently entered into a consulting and services partnership with EMC’s security division, RSA, to provide enhanced offerings and make it easier for commercial and public sector customers to use both companies’ information security expertise and specialized technologies. The partnership’s objectives include: developing joint information security service offerings; simplifying client engagements for security preparedness and incident response; and further assessing the commercialization of advanced security technologies (from Booz Allen) that play a crucial role in detecting and defeating today’s sophisticated computer attacks.

In its annual report, Booz noted that it will continue to pursue new opportunities in the commercial market by building on its cyber-related work and leveraging its core competencies, with a focus on serving industries in which there is a strong intersection between government and commercial interests, such as financial services, healthcare, and energy.

Currently, Booz Allen’s key service offerings to commercial clients include: dynamic defense (cyber), next-generation virtual infrastructure, decision analytics, design for affordability, and smart compliance. Its commercial clients include major commercial banks and investment banks, healthcare providers, energy companies, and utilities.

Booz posts nice bottom-line growth in latest quarter. In the latest fiscal first quarter, Booz Allen’s profit jumped 21% to $61.9 million, or 43 cents per share. This compares with $51.1 million, or 37 cents per share, in last year’s comparable quarter. At the same time, the company’s revenue slipped 1% to $1.43 billion, compared with $1.45 billion in last year’s first quarter.At June 30, Booz Allen had total backlog of $10.23 billion, of which $2.58 billion was funded.

Looking ahead, Booz said it expects adjusted earnings of between $1.60 and $1.70 per share for the year, down from its earlier estimates of between $1.71 and $1.81 per share. Moving forward, Booz believes that the investments it’s making in areas such as cyber, cloud, health, engineering services, enterprise effectiveness and efficiency, commercial, and international businesses will “position the company well for future growth.”

On its first quarter earnings call, Booz highlighted that it’s “investing resources and deploying leaders to business areas that are growing, while noting that it “will continue to grow in government, commercial, and international markets, such as health, finance, and intelligence surveillance reconnaissance.”

Booz also noted that it continues to win major contract awards across all markets in its government business, despite the generally challenging conditions in that sector. The company has also been “proactive and diligent in managing its cost base which has enabled Booz to continue to deliver on bottom-line commitments.”

Our Take:

Overall, we believe that Booz Allen will continue to be aggressive in making moves to remain competitive in today’s challenging federal market, especially in the wake of expected defense budget cuts and increased competition from top-tier rivals.

We like that Booz is making opportunistic acquisitions to expand into new and adjacent markets (especially commercial cyber), while continuing to win key contracts in markets in which it already competes. Looking ahead, we believe that Booz’s growth strategy will ultimately payoff for the company and allow it to achieve success in today’s evolving markets.

Contractor Survival Tactics: Raytheon Focuses on High-Growth Markets, Foreign Sales To Offset Cuts

Thu, 11 Oct 2012 10:06:00 -0400

As part of our efforts to keep tabs on the evolving federal marketplace, we are constantly evaluating how various vendors are performing, and analyzing the steps these contractors are taking to achieve success going forward.

In this week’s blog, we turn the spotlight on defense contracting giant Raytheon Corp., which has been focusing its efforts on high-growth markets like ISR and cybersecurity, while expanding its foreign military sales to offset upcoming federal budget cuts.

Based in Waltham, Mass., Raytheon is among the largest aerospace and defense firms in the U.S., with a diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems, and technical services.

In 2011, Raytheon’s total net sales to the U.S. Government, excluding foreign military sales, were $18.4 billion, representing 74% of the company’s overall net sales. Foreign military sales (through the U.S. Government) were approximately $3 billion. Raytheon’s primary U.S. Government customer is the Department of Defense (DoD); other key federal customers include Intelligence Community agencies, the Departments of Homeland Security, Justice, State and Energy, NASA and the FAA.

FIA Perspective:

Raytheon making acquisitions in high-growth markets to expand capabilities. In 2011, Raytheon acquired California-based Applied Signal Technology Inc. (for $500 million) to broaden its capabilities in Command, Control, Communication and Intelligence (C3I). Raytheon said the acquisition is part of its strategy to “extend and enhance its Space and Airborne Systems (SAS) offerings related to certain classified and DoD markets.” Raytheon’s C3I systems provide integrated real-time support to decision-makers on and off the battlefield, transforming raw data into actionable intelligence. Raytheon’s C3I capabilities include situational awareness, persistent surveillance, communications, mission planning, battle management command and control, intelligence and analysis, and integrated ground solutions. As part of its strategy, Raytheon said it’s “continuing to grow its market presence in C3I and expand its knowledge management and discovery capabilities.”

In 2011, Raytheon also acquired Henggeler Computer Consultants Inc. and Pikewerks Corp. to enhance its cybersecurity and information assurance capabilities at Intelligence and Information Systems (IIS). Pikewerks specializes in cybersecurity, software protection, anti-tamper, information operations, data protection and forensics, while Henggeler focuses on cybersecurity, enterprise architecture, analytics, software, and cloud-based solutions. In its annual report, Raytheon said it “continues to enhance its capabilities in the cybersecurity market as well as leverage the capabilities of the ten cyber acquisitions it has made since 2007.” Raytheon said it’s focusing on providing cyber capabilities to the Intelligence, DoD and DHS markets, as well as embedding information assurance capabilities in its products and IT infrastructure.

In 2011, Raytheon also acquired key business assets of Ktech Corp., expanding the company's capabilities and opportunities in the non-kinetic effects markets. Located in Albuquerque, N.M., Ktech is a leader in pulsed power systems engineering. Ktech’s compact pulsed power systems, combined with its high efficiency magnetron technology, will enable increased integration of directed energy weapons on combat platforms.

While Raytheon hasn’t made any acquisitions thus far in 2012, M&A will continue to be a key component of the company’s overall growth strategy moving forward. At the end of the latest quarter, Raytheon had about $2.5 billion in cash on hand to put towards future acquisitions.

Raytheon aiming to grow international business via foreign military sales. Raytheon believes demand is growing for solutions in air and missile defense, homeland security, air traffic management, precision engagement, naval systems integration, and intelligence, surveillance and reconnaissance (ISR). In addition, as coalition forces increasingly integrate military operations worldwide, Raytheon believes that its capabilities in network-enabled operations will continue to be “a key discriminator in these markets.”

In 2011, Raytheon’s international sales, including foreign military sales through the U.S. Government, totaled $6.2 billion, compared with $5.8 billion in 2010. For 2011, the company’s international bookings checked-in at $7.7 billion, rising substantially from $4.4 billion in 2010.

On its second quarter earnings call, Raytheon Chairman and CEO Bill Swanson said he’s counting on the company’s variety of products and services as well as international business to weather future U.S. defense spending cuts. Swanson highlighted that foreign orders may contribute as much as 30% to Raytheon’s bookings for 2012, up from 25% at the end of the first quarter. He expects future orders for missile defense systems, precision missiles, command control and communications systems and air-traffic control radar from several countries in the Middle East, while noting that Turkey, Kuwait, Oman, Saudi Arabia and the United Arab Emirates could be potential customers.

Raytheon posts solid financials in 2Q. In the latest second quarter, Raytheon’s net income jumped to $471 million, or $1.41 per share, compared with $438 million, or $1.20 per share, in the prior-year period. At the same time, Raytheon’s revenue slipped 3.4% to $5.99 billion, compared with $6.2 billion in the previous year’s comparable quarter. At the end of the latest quarter, Raytheon’s total backlog was $33.9 billion, of which $23.1 billion was funded.

Looking ahead, Raytheon raised its full-year profit forecast from continuing operations to $5.15 to $5.30 a share, compared with an earlier forecast of $5 to $5.15 a share. For 2012, Raytheon maintained its sales guidance in the range of $24.5 billion to $25 billion.

Raytheon “well-positioned” for future DoD opportunities. In January 2012, the DoD issued strategic guidance on the U.S. defense priorities for the next ten years in light of the geopolitical environment and U.S. Government finances. The DoD guidance identified the primary missions of the U.S. armed forces and the capabilities expected to be critical to future success, including ISR, missile defense and cybersecurity. Although the actual impact of implementation of the strategic guidance on the DoD budget and Raytheon’s programs is uncertain at present, the company believes it’s “well positioned” to support many of these critical capabilities going forward.

In its annual report, Raytheon noted that it’s currently involved in over 15,000 contracts, with no single contract accounting for more than 5% of its total net sales for 2011. The company also believes that its “diverse portfolio of programs and capabilities is well suited to the changing defense environment.”

Our Take:

Overall, we believe Raytheon is a well-diversified defense contractor with history of strong order bookings and order backlog. The company also has a solid balance sheet, with growing cash flow and operational improvements.

In the future, we expect Raytheon’s growth to be driven by its focus on ISR- and missile-related technologies, cybersecurity, and foreign military sales. However, with potential reductions to the U.S. defense budget on the horizon, and numerous high-cost programs at risk, it’s difficult to predict if Raytheon could see future order reductions or cancellations moving forward.

Despite the potential risks, we like that Raytheon has a clearly-defined growth strategy, and believe that its focus and investments in key high-growth markets (such as ISR and cybersecurity) will align well with future defense priorities, which should allow the company to remain competitive and achieve success in today’s challenging federal market.

M&A Activity Dips In 3Q: Deals In Cloud Computing And Cyber Lead Transactions

Wed, 03 Oct 2012 09:33:00 -0400

Mergers and acquisitions activity in the defense and government services sector continued to move along in the latest third quarter, and is expected to remain robust for the remainder of the year as larger contractors continue to seek out smaller firms operating in hot sectors like cloud computing and cybersecurity to help offset expected federal budget cuts.

Among the contractors we track, there were 40 deals announced during the latest third quarter, off slightly from 43 deals announced in the second quarter, and 47 deals in last year’s third quarter.

M&A activity in the third quarter was driven by five transactions which had valuations of over $1 billion, including Dell’s acquisition of IT management software maker Quest Software for $2.4 billion, and Chicago Bridge & Iron Co.’s purchase of AEC firm Shaw Group Inc. for roughly $3 billion.

Other significant purchases in the third quarter included VMWare’s buyout of software-defined networking firm Nicira for $1.26 billion, and IBM’s purchase of HR management software provider Kenexa Inc. for $1.3 billion. Also in the latest quarter, private equity firm Thoma Bravo acquired enterprise software firm Deltek Inc. for $1.1 billion.

FIA Perspective:

Smaller deals in federal growth markets drive M&A activity. During the latest third quarter, there were several M&A transactions announced in the cloud computing and cybersecurity markets, and we expect these trends to continue going forward. M&A activity in the cloud sector was very strong in the latest third quarter, continuing its momentum from earlier in the year.

In one of the larger deals announced in the cloud market (besides IBM/Kenexa above), VMWare agreed to acquire DynamicOps, a Burlington, Mass.-based cloud computing startup that was spun out of banking giant Credit Suisse’s IT department, for between $100 and $150 million. DynamicOps is a leader in the emerging market for cloud automation solutions.

Cisco also continued its foray into the cloud in the latest third quarter, acquiring Virtuata to help secure virtual machine data in multi-tenant data centers. Virtuata helps to isolate each virtual machine from others in the same virtualized data center or cloud environment, and will allow Cisco to address security concerns among enterprises and service providers.

Other notable deals in the cloud sector included Rackspace’s purchase of e-mail application integrator Mailgun, and Citrix’s acquisition of Beetil, which provides cloud-based service desk technology. In addition, Lenovo agreed to buyout Stoneware, which makes cloud products used in the education and government sectors, for an undisclosed amount.

Overall, top-tier IT companies enhancing their presence in the cloud computing space should come as no surprise; the cloud market is slated to be one of the most attractive growth markets for IT firms over the next several years. According to Deltek’s Federal Cloud Computing Services Outlook, 2012-2017 report, the demand for vendor-furnished cloud computing services by the U.S. government will increase from $734 million in FY2012 to $3.2 billion in FY2017, representing at a CAGR of 34%.

For the remainder of the year, we expect top-tier IT firms to continue their expansion into the cloud market, targeting smaller firms providing unique or distinctive solutions to enhance their overall market share, while allowing them to compete for future opportunities.

On the cybersecurity front, there were five deals announced in the latest third quarter which involved firms providing cyber solutions or products, up significantly from the number of cyber-related deals announced in the second quarter.

Notable deals included Apple’s acquisition of AuthenTec for $356 million, and General Dynamics’ purchase of Fidelis Security Systems for an undisclosed sum. AuthenTec designs security products for mobile devices such as fingerprint sensors, while Fidelis provides cyber tools that provide real-time network visibility, analysis and control.

Earlier this month, KEYW Holdings Corp. also made two significant cyber purchases, acquiring Poole & Associates for $126 million and Sensage for $34.5 million. Poole will expand KEYW’s software engineering presence in the Intelligence Community (IC), while Sensage will allow KEYW to expand its addressable market into securing critical infrastructure. Both of these acquisitions should significantly enhance KEYW’s top-line growth moving forward.

We believe that M&A activity in the cyber arena will continue to be robust for the remainder of the year, as larger IT firms look to extend their addressable markets while recognizing the vast number of smaller firms with unique cyber-related capabilities.

Elsewhere, there were several notable acquisitions in other markets which were previously hot sectors (health IT, geospatial and wireless). In July, SAIC acquired health IT consulting firm maxIT Healthcare for $493 million, while DigitalGlobe acquired rival satellite imagery firm GeoEye for $900 million. AT&T also made a significant purchase in the latest third quarter, snapping up mobile service provider Nextwave Wireless for $600 million.

Our Take:

Looking ahead, we expect M&A activity in the defense and government services sector to continue to be strong for the remainder of the year, as federal contractors look to acquisitions in new and adjacent markets to make up for lost revenues resulting from expected future budget cuts.

Contractor Survival Tactics: General Dynamics Making Acquisitions To Offset Tightening Budgets

Fri, 28 Sep 2012 10:22:00 -0400

Over the past few weeks, we have been highlighting how various vendors are dealing with today’s challenging federal market, and outlining some of the steps these contractor’s are taking to achieve success going forward.

In this edition, we would like to turn the spotlight on defense giant General Dynamics Corp., which has been among the most active participants in the M&A arena since early May, acquiring five companies to expand its list of capabilities and addressable markets.

FIA Perspective:

General Dynamics expanding capabilities in several growing markets via recent acquisition spree. Below we highlight the recent acquisitions GD has made, and detail how these purchases may help the company going forward.

In early May, GD acquired IPWireless Inc. for an undisclosed sum. Based in San Francisco, IPWireless provides 3G and 4G LTE wireless broadband network equipment and solutions for first-responder and military customers. The acquisition will allow GD to expand its commercial networking solutions to better serve the needs of its customers, including municipalities who are moving to broadband public safety networks such as the FirstNet nationwide interoperable broadband network.
In late June, General Dynamics bought Earl Industries ship repair and coatings division to enhance its ability to compete for Naval contracting opportunities. The ship repair and coatings division of Earl Industries is a prime contractor for nuclear aircraft carrier programs, and provides maintenance and repairs for other Naval ships. Financial terms for the transaction weren’t disclosed.
In mid-August, GD said it would acquire Fidelis Security Systems, a provider of network security tools that provide real-time network visibility, analysis and control. Based in Waltham, Mass., Fidelis' solutions help customers stop advanced threats and prevent data breaches by providing visibility into the complex layers of a network, exposing malicious content in real-time. This acquisition will allow GD to expand its capabilities in the growing cybersecurity market, with a particular focus on incident response and situational awareness. Earlier this year, GD opened its Cyber Intelligence and Solutions Center located in Annapolis Junction, which houses experts working on cyber threat detection and mitigation solutions.
In late August, General Dynamics acquired the defense operations of Gayston Corp., which supplies precision metal components used in several munitions programs. Gayston's defense unit makes rocket motor tubes for the U.S. Army's Hydra-70 air-to-ground rocket program. It also provides liners and cartridges for 40mm ammunition rounds and components for 60-120mm mortar rounds, among other things.
Earlier this month, GD also acquired virtualization security software start-up Open Kernel Labs Inc. for an undisclosed amount. OK Labs provides virtualization software for securing wireless communications in the corporate and government sector. In addition, Open Labs creates apps and content for mobile devices and in-vehicle 'infotainment' systems. This acquisition will expand GD’s capabilities as a provider of secure mobile devices for public safety, civilian, military and commercial customers.

In 2011, General Dynamics spent $1.6 billion on six acquisitions, compared with three purchases in 2010 for $233 million.

Our Take:

Overall, we believe that General Dynamics will continue to be aggressive in making moves to remain competitive, while expanding its capabilities in growing markets such as cybersecurity and wireless.

Over the next few years, companies which will succeed in this challenging environment will need to be flexible and make strategic adjustments where needed. We believe General Dynamics is taking these necessary steps, and that the company’s M&A strategy will expand its addressable markets and list of customers moving forward, while enhancing its ability to pursue future opportunities in growing markets.

At the end of last quarter, GD had about $2.54 billion in cash and cash equivalents in its war chest to put towards future acquisitions.

Contractor Survival Tactics: KEYW Continues To Make Acquisitions, Expands Into Commercial Market

Fri, 21 Sep 2012 10:25:00 -0400

At FIA, we are always watching the federal marketplace, and I personally have an interest in what’s going on in the mergers and acquisitions (M&A) arena surrounding cybersecurity, a market which is rapidly evolving and always seems to be in the news.

FIA Perspective:

KEYW makes two key acquisitions, which should significantly enhance revenues moving forward. Last week, KEYW said it planned to acquire software maker Poole & Associates Inc. for $126 million in an effort to boost its ability to win more work within the intelligence community.Based in Annapolis Junction, Md., Poole offers a broad range of high-end technical capabilities including systems and software engineering, program management support, and technical training.

For 2012, Poole is expected to generate about $60 million in total revenue, which should significantly enhance KEYW’s projected top-line growth. Poole is also expected to generate about $90 million in revenue for 2013, and had a total backlog of around $225 million at the end of the latest quarter.

In terms of contracts, Poole was recently awarded a five-year $150 million prime contract to provide systems engineering and program management support to an intelligence customer. Looking ahead, KEYW CEO Leonard Moodispaw said the acquisition will expand KEYW's footprint with one of its most important customers, while adding several prime contract vehicles that have significant growth potential with a key customer.

On Thursday (9/13), KEYW also announced that it’s purchasing Sensage Inc., a provider of advanced Security Information and Event Management (SIEM) and event data warehousing software solutions, for $34.5 million. In addition to providing KEYW an expanded commercial market opportunity, this acquisition strategically supports Project G, KEYW’s new cyber awareness and response platform geared towards critical infrastructure.

KEYW expanding its footprint into commercial and adjacent markets. In addition to acquisitions, KEYW has several new initiatives on the horizon in order to expand its addressable markets. KEYW recently said it continues to make strides on its “horizontal path” effort (Project G), which will target security for critical infrastructure. The company noted that Project G includes a national-security derived cyber-defense solution for critical infrastructure, and said the Sensage acquisition will be a key component of a new generation of cyber awareness products and services that KEYW is preparing for commercial launch in early 2013.

Elsewhere, KEYW has also invested (via its Flight Landata acquisition) in building an unclassified geospatial data system that is based on its knowledge of the classified version of a similar capability. This system will provide users in the first responder and national guard communities’ access to intelligence community (IC) quality data on devices, while expanding the company’s footprint beyond cybersecurity. In addition, KEYW said that it’s also pursuing opportunities in cloud computing, mobile device applications, classified and unclassified training programs, and synthetic aperture radar, which should all expand KEYW’s capabilities moving forward.

In the latest second quarter, KEYW saw its revenues jump 25% to $56.2 million, while noting that it’s “continuing to invest in key R&D initiatives, including Project G.” Previously, KEYW said that its “pipeline of new opportunities looks very promising in terms of new proposal activity, growth in existing programs, and opportunistic acquisitions."

Our Take:

Overall, we believe that KEYW will continue to be aggressive in making moves to remain competitive in the ultra-intense cyber market, especially in the wake of proposed defense budget cuts and increased competition from top-tier rivals.

With the cyber market being targeted as one of the few areas slated for growth over the next several years, numerous contractors are currently looking to invest in cybersecurity as an inorganic means of driving revenue growth, which should further fuel competition for cyber-related opportunities, acquisitions and market share in the near-term.

By continuing its aggressive M&A strategy and expanding into new and adjacent markets (and beyond the intelligence community), we believe KEYW is taking the necessary steps to remain competitive and carve out a niche in today’s evolving cyber market, which should ultimately payoff for the company and allow it to achieve success going forward.

Contractor Survival Tactics: SAIC Splits Company In Two; Investing In Health IT Via Acquisitions

Tue, 11 Sep 2012 10:25:00 -0400

In today’s evolving federal marketplace, contractors of all sizes are evaluating their current strategies to achieve success going forward, while bracing for potential budget cuts that could significantly impact the way they do business over the next several years.

Over the past few months, one company which has been making noticeable moves is federal contracting giant SAIC, which recently announced plans to split into two separate companies, while also boosting its presence in the health IT sector with the acquisition of maxIT Healthcare. In addition to the split, SAIC also recently said it would divest its operational test and evaluation unit, which generates roughly $75 million in annual revenue.

FIA Perspective:

SAIC seeks to unlock long-term value/growth potential via business spin-off. Last week, SAIC said it plans to spin-off its government services business, separating it from the unit that provides IT for the national security, health and engineering markets. Under the proposed plan, the government services unit is expected to generate about $4 billion in revenue for fiscal 2013, while the national security business will book around $7 billion in revenue.

SAIC said the move is intended to reduce potential operational conflicts of interest (OCI), especially for the government services unit, while allowing the two companies to be "more differentiated and more competitive in their own space." It will also provide SAIC more business opportunities – the company noted that it has already identified over 150 new opportunities within the Department of Defense alone worth around $25 billion. SAIC said it expects the spin-off to occur in the latter half of next fiscal year.

Over the past few years, a number of larger contractors in the defense and government services market have looked at spin-offs as a way to maximize value, while allowing the separate businesses to more narrowly focus on the markets they service. Recent examples include L-3 Communication’s spinoff of Engility, which encompassed the majority of L-3’s government services business, and ITT Corp.’s spin-off of its ITT Exelis and Xylem Inc. businesses.

Northrop Grumman has also been divesting units over the past several years. In 2009, the company sold its TASC advisory services unit to an investor group led by General Atlantic LLC and Kohlberg Kravis Roberts & Co. for $1.65 billion. In 2011, Northrop also spun-off its Huntington Ingalls shipbuilding business to shareholders after failing to find a suitable buyer.

SAIC expanding in Health IT sector via acquisitions. In July, SAIC agreed to acquire healthcare IT consulting firm maxIT Healthcare for $473 million. The acquisition expands SAIC’s capabilities in providing EHR implementation and integration services to its large base of federal healthcare customers, as they move toward the use of commercial-off-the-shelf (COTS) EHR applications.

maxIT, which is the largest private independent healthcare IT consulting firm in North America, provides a wide range of health IT services and solutions primarily to commercial hospital groups and other medical delivery organizations. These include IT strategy and planning, electronic health record (EHR) implementation and optimization, and management consulting across a broad range of activities such as accountable care transformation.

Last year, SAIC also acquired Vitalize Consulting Solutions (VCS), a provider of clinical, business and IT services for healthcare enterprises, for an undisclosed sum. Combined, these two acquisitions will allow SAIC to compete for new opportunities in the growing health IT market, an area where the company previously had little experience.

Besides acquisitions, SAIC has also been making divestitures to become more streamlined and efficient, including recent plans to sell its operational test and evaluation business (mentioned above). In April 2011, SAIC also sold certain assets that provided IT services to international oil and gas companies. These assets, which were sold to Wipro Ltd. for an undisclosed sum, included SAIC's U.S. oil and gas IT services business along with units SAIC Ltd., of the U.K.; Science Applications International, Europe S.A.R.L., of France; SAIC India Private Ltd., of India; and its Middle East operation, SAIC Gulf LLC.

At the time, SAIC said the sale of the oil and gas assets would enable the company to better focus on its strategic growth areas, including market segments in the energy sector, such as smart grid, renewable energy implementation, and energy efficiency, where it has successfully built its business through organic growth and acquisitions.

Previous spinoffs could set the stage for further divestitures within the government sector. Looking to the future, the SAIC, L-3 and ITT spin-offs could serve as a model for other large and mid-sized conglomerates looking to reorganize themselves by breaking-off units to survive in today’s challenging federal marketplace.

It’s also worth noting that investors prefer to invest in publicly-traded companies that are “pure plays,” or single-industry enterprises, which could further drive the trend towards spinning-off or divesting various units going forward. Companies which could potentially spin-off units in the future include mid-tier defense contractors like Textron and Kratos Defense & Security Solutions, and tech giants such as Hewlett-Packard or VMWare.

Our Take:

Overall, we believe that SAIC will continue to be aggressive in making moves to remain competitive while streamlining operations, especially in the wake of proposed defense budget cuts and a challenging federal marketplace which is constantly evolving. We believe SAIC sees the writing on the wall with regard to the slowdown in the federal IT sector, and will be making investments in areas that are slated for growth over the next several years.

Moving forward, companies which will succeed in this challenging landscape will need to be flexible and make strategic adjustments where needed, and we believe SAIC is taking the right steps to remain competitive in these uncertain times.

CACI Performing Admirably In Today?s Evolving Federal Market

Tue, 04 Sep 2012 08:25:00 -0400

At FIA, we are always checking the pulse of the federal contracting marketplace, and keeping track of how various vendors are executing on their strategies to achieve success going forward.

Last week, we listened in on CACI International Inc.’s earnings call to investors, and came away impressed with some of the numbers disclosed on the call, and outlook for the company moving forward. Below we highlight some of the details CACI provided on the call.

FIA Perspective:

CACI posts solid financials in FY2012 despite challenging market conditions. For fiscal 2012, CACI’s revenues rose 5.5% to $3.77 billion, compared with $3.57 billion in fiscal 2011. At the same time, the company saw its net income climb over 16% to $167.6 million, up from $144.2 million a year ago.

For fiscal 2013, CACI said it expects revenues to be between $3.8 billion and $4 billion and net income to be between $160 million and $167 million.

On its earnings call, CACI noted that it has “a large and established client base providing a steady stream of new opportunities.” Because the company offers a broad range of capabilities and services, CACI said it maintains a large addressable market, and is “executing on roughly 2,200 ongoing contracts or task orders.”

CACI also said its “new business win rate and high re-compete win rate allow it to continuously refresh its current program and add new business across its platform.” This large addressable market provides CACI room to maneuver as it sees opportunities, while the diversity of its clients and contracts minimizes the risk associated with any individual program, the company said.

CACI seems to be clicking on all cylinders in evolving federal market. Looking ahead, CACI said it has “examined its addressable market of approximately $235 billion and identified 10 market segments that are high-priority missions for its clients, including Intelligence, Cyber, Business Systems and Healthcare.

In fiscal 2012, CACI noted that it had its “best year yet for funding orders,” totaling more than $3.9 billion, which is up 8.8% over fiscal 2011. Its fiscal 2012 awards also reached record levels and totaled $4.5 billion, up 40.8% from fiscal 2011. The company’s fourth quarter awards, like those throughout the year, represent strong growth in CACI’s Cyber, Business Systems, Healthcare and Intelligence markets and continued volume in its C4ISR, Enterprise IT and integrated security solutions markets, the company said.

As its recent contract awards and funding orders illustrate, CACI continues to “see attractive opportunities for growth in its markets and believes it’s well positioned to capture those opportunities.” CACI closed the year with a total backlog of $7.2 billion, a 5.9% increase over last year. In addition, its funded backlog grew 7.2% over last year as well.

As CACI looks to fiscal 2013, its opportunity pipeline “remains very strong.” Specifically, at the end of the fourth quarter, CACI had more than $9 billion in supported proposals under evaluation with various agencies, and it expects to submit another $11.7 billion of proposals over the next 6 months. Over half of this pipeline is for stand-alone contracts and task orders, which will fuel the company’s revenue growth, CACI noted.

M&A remains a key part of CACI’s long-term growth strategy. Layered on top of CACI’s organic growth focus is its strategic mergers and acquisitions (M&A) program. Over the past 20 years, CACI highlighted that it has completed more than 57 acquisitions, which has extended the company’s client base, solutions and addressable markets.

CACI noted that its recent acquisition of APG and Delta Solutions are examples of how it uses M&A to support its long-term growth objectives. APG boosts CACI’s capabilities in the Oracle E-Business Suite, while Delta expands its SAP and Momentum System capabilities. Both acquisitions provide CACI core capabilities that enable the growth of its Business Systems market segment, while supporting its government transformation activities.

In the future, CACI said it expects to continue to use strategic M&A in a “disciplined way” to complement its organic growth, ensuring it will remain aligned with the company’s clients' highest priorities, while creating “sustainable, long-term organic growth.”

Analyst's Take

Overall, we believe CACI has done an admirable job in identifying areas that are slated for growth, including Intelligence, Cyber, Business Systems and Healthcare. Going forward, it will be interesting to see if CACI can continue to outperform in the federal marketplace, while remaining agile and executing in today’s challenging and evolving market.

SRA Holding Its Own In Today?s Challenging Federal Marketplace

Fri, 17 Aug 2012 08:54:00 -0400

At FIA, we are always checking out how various vendors are performing in the federal contracting marketplace, and keeping track of how these firms are executing on their various strategies to achieve success going forward.

In this week’s installment, we would like to highlight SRA International Inc., which provides technology and strategic consulting services and solutions primarily to U.S. government clients (accounted for 98% of SRA’s total revenues for the quarter ended March 31, 2012).

Based in Fairfax, VA., SRA provides services, systems, and solutions that enable mission performance, improve efficiency of operations, and/or reduce operating costs. Currently, the company has a balanced portfolio of clients and is organized into four business groups: Civil, Defense, Health, and Intelligence, Homeland Security and Special Operations.

FIA Perspective:

SRA has a nice blend of contracts, which includes several top-tier programs. SRA’s contract portfolio encompasses a nice mix of IDIQs, GWACs, and IQCs, which gives the company a solid overall balance in today’s competitive market. SRA’s top contracts include spots on the GSA’s $50 billion Alliant program, DHS’s $45 billion EAGLE program, GSA’s $25 billion MILLENNIA program, and the Army’s $23 billion R2 program, among others.

In addition, SRA was also recently named as an awardee on the National Institutes of Health’s (NIH) $20 billion CIO-SP3 contract vehicle, a follow-on to the CIO-SP2 contract. This 10-year, multiple-award IDIQ contract supports the Federal Enterprise Architecture, the Department of Defense Enterprise Architecture, and the Federal Health Architecture. Under the predecessor contract (CIO-SP2), SRA performed admirably, winning about 14% of the work, or $404 million in revenues from 2001 to 2012.

In April, SRA also was awarded a spot on the VA’s $12 billion T4 program, which is expected to run for 5 years. Thus far, SRA has won 8 task orders under the new program, recording about $12.5 million in total revenues.

In mid-June, the U.S. Transportation Command (USTRANSCOM) also awarded SRA its Defense Personal Property System (DPS) contract, which carries a total value of $17.6 million if all options are exercised. Under the contract, SRA will manage two major DPS software releases, in addition to providing training and learning management, engineering services, configuration management and operations maintenance support.

Elsewhere, SRA also received (in May) the sole award for the U.S. FBI’s operational response and investigative online network (ORION) program. The award includes one base year plus seven options for one year each, and carries a value of $19 million if all options are exercised. ORION is the FBI’s next generation crisis information management system.

SRA’s top federal customers currently include the Defense Department, Air Force, Marine Corps, Defense Logistics Agency, Agriculture Department, Food and Drug Administration, Federal Aviation Administration, and Homeland Security Department, among others.

Going private will allow the SRA to cut costs, while the company aims to improve efficiencies. In July 2011, Providence Equity Partners completed the acquisition of SRA for $1.88 billion. Since the acquisition, SRA has brought in a new CEO in Bill Ballhaus and has divested several businesses so it can focus on the core IT services business. Looking ahead, SRA should benefit from being a private company, as the company will no longer be required to make SEC-related disclosures, which should allow the company to cut costs while it looks for further operating efficiencies.

To maintain a competitive cost position in this challenging market environment, SRA said it continually looks to improve the efficiency of its internal operations. As part this effort, SRA has initiated a reduction in its indirect labor force during the fourth quarter of fiscal 2012. This will result in indirect cost savings for SRA, some of which will be reinvested in the company’s corporate growth initiatives moving forward.

SRA posts solid top line results, while bottom line struggles. From July 31, 2011 through March 31, 2012, SRA reported a net loss of $21.5 million on revenues of $1.15 billion, according to the company latest quarterly report. During that same time frame, SRA said its organic growth rate slipped 3.4%.

In the report, SRA noted that it received approximately $227.1 million and $1.11 billion of total contract awards during the three and nine months ended March 31, 2012, respectively. At the end of March, SRA also had a total backlog of $3.86 billion, of which $877 million was funded. SRA said it expects to recognize approximately 26% of the above backlog as revenue within the next twelve months.

Looking ahead, SRA’s growth strategy includes investing in existing services while expanding its offerings and customer base worldwide through strategic mergers and acquisitions.

While SRA expects the federal government to make continued investments in areas such as cyber security, operating efficiency, intelligence, surveillance and reconnaissance, and to continue supporting the intelligence community as well as special forces capabilities, the company maintains its belief that the constrained government spending environment will result in “modest market growth for the foreseeable future requiring an increase in market share to achieve more robust growth.”

Our Take:

Overall, we like that SRA is looking to broaden its client base and expand its offerings, while taking steps to improve its operating efficiency. Looking ahead, we believe SRA may face difficulties in competing with larger, more well-established contractors in today’s evolving federal market.

Within the federal market, we expect mid-tier contractors like SRA to face increasing challenges in winning new contracts due to tightening budgets and intense competition from top-tier rivals. While SRA has had success winning numerous large contracts in the past, and is doing a decent job of winning task orders under these major contract vehicles, we believe the company will have to step-up its game to increase market share in today’s intensely competitive federal market, and to achieve greater success going forward.

VMware Making Moves To Win Market Share In Virtualization/Cloud Markets

Thu, 02 Aug 2012 08:34:00 -0400

The cloud computing and virtualization markets seem to be hot topics in the technology sector days, which places small- and mid-tier firms providing these technologies at the forefront of exciting changes taking place within the marketplace. Within the federal group at Deltek, we are always keeping tabs on these hot sectors, and I personally have an interest in what’s going on in the Mergers and Acquisitions (M&A) arena surrounding these hot markets.

Within these sectors, one company which has been making noticeable moves over the past few months is virtualization software juggernaut VMware, which has been among the most active participants in the M&A market, snapping up small- and mid-tier players to add “breadth and depth” to its product lines.

Last week, VMware agreed to acquire software-defined networking form Nicira for $1.26 billion, as it continues its efforts to virtualize all aspects of the data center. Nicira, which is VMware’s largest acquisition to date in terms of price, provides software that creates an abstraction layer between servers and networking gear, allowing organizations to decouple the network topology from the equipment, creating virtualized pools of networking capability. The deal is expected to close by the end of the year.

FIA Perspective:

VMware continues to make acquisitions in virtualization and cloud markets. Over the past several years, acquisitions have been an integral part of VMware’s growth strategy, and the company has been focusing on smaller firms which can be easily integrated into its existing product portfolio, thereby expanding its product lines in the areas of virtualization and cloud management.

Besides the Nicira purchase, VMware has been making other recent moves in the M&A arena, and we highlight each of these acquisitions below:

Last month, VMware acquired cloud computing provider DynamicOps Inc. for an undisclosed sum. Burlington, Mass.-based DynamicOps develops solutions that help in running virtual workloads (hypervisor) across diverse cloud platforms. Hypervisor software (also known as virtual machine manager) allows several operating systems to share a single hardware host.
In May 2012, VMware also acquired Wanova Inc., a cloud-based desktop virtualization solutions provider, for an undisclosed amount. The Wanova technology makes thick or thin Windows devices manageable in a very flexible and centralized way, and complements VMware’s View product line and emerging horizon portfolio of multi-device end-user solutions.
In late April, VMware purchased Cetas, a big data startup that provides analytics atop the Hadoop platform, for an undisclosed amount. This acquisition is expected to strengthen VMware’s Cloud Applications Platform moving forward.

In 2011, VMware completed 7 acquisitions to expand its portfolio in the areas of virtualization and cloud computing, including Digital Fuel, Neo Accel, Packet Motion, Shavlik, SlideRocket, Socialcast and WaveMaker. It also acquired certain assets from EMC's Mozy cloud-based data storage and data services.

Overall, we believe VMware will continue to look to acquisitions to drive its long-term growth strategy, and allow it to better compete with top-tier rivals (like Microsoft and Citrix Systems) in the high-growth virtualization and cloud computing markets. At the end of the latest quarter, VMware had about $5.35 billion in cash and cash equivalents in its arsenal to put towards further acquisitions.

VMware posts solid results in 2Q. In the latest second quarter, VMware saw its revenues rise 22% to $1.12 billion compared with last year’s second quarter. At the same time, the company said its per-share profit minus items rose 24% to 68 cents from 55 cents in the year-earlier quarter. On its earnings call, VMware noted that its “deal pipeline remains very strong,” and that it “expects to have a solid second half of 2012.”

Looking ahead, VMware anticipates revenue in the range of $4.54 billion to $4.64 billion for fiscal 2012, an increase of 20.5% to 23% from fiscal 2011, primarily driven by strong license revenue growth. It also expects operating margins in the range of 30.25% to 31.25% for 2012, the company said.

Management shuffle should benefit both VMware and EMC. A few weeks ago, VMware and its majority owner, storage giant EMC Corp. (which owns 80% of VMware), announced a management reshuffle that will give the CEO position at VMware to Pat Gelsinger, an EMC executive. He will be replacing Paul Maritz, a former Microsoft executive, who will be taking the Chief Strategist position at EMC. Gelsinger plans to take over the reins at VMware in September.

With the executive swap, Maritz may be in line to become the new vice-chairman at EMC, and looking towards replacing current EMC Chief Executive Joe Tucci at some point in the not-so-distant future. Tucci, who had recently planned to retire in 2012 (but has now backed off), is 65 years old, and probably relatively close to the end of his tenure as CEO.

Overall, this will likely be a smart and smooth transition for both companies, with the executive swap potentially enhancing both VMware's and EMC’s CEO positions moving forward. The executive moves are also likely to allow VMware and EMC to better-align their product portfolios, while boosting the potential for new software-based, higher-margin revenue streams at EMC.

Around the time the executive change was announced, it was also rumored that VMware and EMC may be planning to spin-off some of their cloud assets into a separate company, according to a report by GigaOm. The article noted that the new company would include VMware’s Cloud Foundry platform-as-a-service division and EMC’s Greenplum business, as well as an EMC/VMware joint venture in the infrastructure-as-a-service segment called Project Rubicon. GigaOm noted that the spin-off would be put together to build a cloud computing services firm that could complete with top rivals Google, Microsoft and Amazon.com.

Conclusion:

Any way you slice it, VMware is positioning itself to be a top-tier performer in the virtualization and cloud computing markets. With the recent management changes, acquisitions, and potential spin-off of its cloud assets, the company is making noticeable moves to establish a market leading position in these high-growth sectors, while enhancing its product portfolio to pursue growth within the virtualization and cloud markets over the next several years.

Oracle Uses Cloud Computing/Social Media Acquisitions To Build Oracle Cloud

Fri, 27 Jul 2012 07:58:00 -0400

Business software titan Oracle Corp. has been on acquisition spree over the past six months, snapping up several small- and mid-tier firms to expand its capabilities in both the cloud computing and social media markets, two areas poised to see significant-growth over the next several years.

Below, we highlight some of Oracle’s recent purchases, and breakdown how these purchases can benefit the company moving forward.

Last week, Oracle acquired San Francisco-based Involver for an undisclosed sum. Involver provides social market language and a social media development platform that enables developers to create highly-customized marketing applications for social media sites and web campaigns. Involver will provide Oracle with a powerful toolset for helping brands create custom applications as they adjust to evolving changes in marketing brought on by social sites like Facebook, Twitter, and YouTube.
In early June, Oracle announced that it was purchasing Collective Intellect, a social media analysis firm, for an undisclosed sum. With this acquisition, Oracle is aiming to enhance its ability to analyze social media for customers. Collective Intellect’s cloud-based software claims to be able to scan Twitter messages and blog posts to determine a user’s intent and interests.
In May, Oracle announced its plans to acquire social marketing platform Virtue for $300 million. Over the past few years, Vitrue has grown to become one of the most popular solutions for big companies trying to win Facebook fans and push out marketing messages to the news feed. Beyond Facebook, Vitrue helps marketers manage their presences on Twitter, YouTube, Pinterest, and Instagram, among other platforms.
In April, Oracle completed the acquisition of Taleo Corp., a provider of cloud-based talent management solutions, for $2 billion. Taleo gives Oracle tools that help firms manage human resources, recruit employees and set compensation.
In late March, Oracle bought ClearTrial, a cloud-based company in the business of biopharmaceutical and medical trials. This acquisition will become a key part of Oracle’s closed-loop clinical trial management offering, with features guiding the client from planning to payments.
In January, Oracle completed the acquisition of RightNow Technologies Inc. for $1.5 billion. RightNow provides cloud-based customer services, including solutions to help companies handle customer interactions across a multitude of channels, including call and contact centers, the Web and social networks.

Looking ahead, Oracle believes that an active acquisition program is “an important element of its corporate strategy,” as it strengthens its competitive position, enhances the products and services that it offers, and expands its customer base. Over the past few years, Oracle noted that it has invested billions of dollars to acquire a number of companies, products and services, and technologies that have enhanced its existing offerings and extended its addressable markets.

Moving forward, Oracle intends to continue to make acquisitions to advance its corporate strategy, and had about $30.7 billion in its war chest at the end of the latest quarter to pursue further acquisitions.

With Oracle making several acquisitions within the cloud computing sector over the last few years, let’s check-out what the company’s cloud strategy encompasses moing forward. Currently, Oracle’s cloud strategy offers customers a broad portfolio of enterprise-grade software and hardware products and services that are secure, scalable and reliable, while enabling interoperability and portability.

Overall, Oracle offers customers a “pragmatic roadmap” to adopt the cloud computing environment that best fits a specific customer’s needs, whether that is a “private” cloud or a “public” cloud. Private clouds are basically exclusive to a single organization, whereas “public” clouds are used by multiple organizations on a shared basis and hosted and managed by a third-party service provider.

As part of its cloud strategy, Oracle introduced its “Oracle Cloud” offering in early June, which includes the company’s cloud software subscription offerings such as Oracle Fusion Human Capital Management Cloud Service, Oracle Fusion Customer Relationship Management Cloud Service, Oracle RightNow Customer Experience and Oracle Taleo Talent Management Cloud Service, among others. All of these offerings provide Oracle customers with software application functionality within a cloud-based IT environment that the company manages and offers via a subscription-based model. Oracle Cloud also includes software platforms within a cloud-based IT environment that it manages and offers to customers via a subscription-based model, including Oracle Database Cloud Service and Oracle Java Cloud Service.

Within the federal market, spending on vendor-furnished cloud computing services is expected to grow from $734 million in fiscal 2012 to $3.2 billion in fiscal 2017 at a compound annual growth rate (CAGR) of 34%, according to a Deltek report. On a global basis the numbers are even greater - the global cloud computing market expected to grow from $40.7 billion in 2011 to more than $241 billion in 2020, according to Forrester Research.

Looking ahead, we expect that Oracle’s Cloud offering will substantially increase the company’s ability to gain market share in this high-growth growth market over the next several years. Currently, Oracle only takes in about $1 billion in revenue from its cloud computing solutions, so the company should be able to exponentially grow its cloud-related revenues (on both the federal and global levels) moving forward.

While potential growth in cloud market looks rosy, we also wanted to note that Oracle will face stiff competition from top-tier rivals (Microsoft, IBM, Hewlett-Packard, SAP AG and Salesforce.com) in competing for cloud computing market share over the next few years. In addition, we also believe Oracle may see some integration hurdles related to its numerous cloud acquisitions over the past year, and the weaving together of these various cloud capabilities to develop a streamlined cloud computing offering in the near-term.

Salesforce.com Growing Cloud Computing/Social Media Presence Through Acquisitions

Thu, 19 Jul 2012 11:04:00 -0400

At FIA, we are always examining how various vendors are performing in the federal contracting marketplace, and keeping tabs on how these firms are executing their various strategies to achieve success going forward.

In this week’s installment, we would like to highlight Salesforce.com Inc., a provider of enterprise cloud computing and social enterprise solutions. Over the past few years, Salesforce has been making noticeable moves in the cloud computing and social media sectors via acquisitions, while attempting to solidify its market share versus top-tier rivals in these high-growth markets.

FIA Perspective:

Salesforce keeping pace with rivals Oracle and SAP in high-growth cloud and social media markets. Since early 2011, Salesforce has been among the most active players on the M&A front, snapping up numerous small- and mid-tier firms to enhance its cloud computing and social media portfolios.

Since the beginning of 2011, Salesforce has spent over $1.5 billion on 9 acquisitions to extend its cloud and social media capabilities, while noting that it regularly evaluates acquisitions or investment opportunities in complementary businesses, joint ventures, services and technologies, and intellectual property rights.

In its annual report, Salesforce stated that it expects to continue to make investments and acquisitions as part of its growth strategy, and plans to reinvest a “significant portion of its incremental revenue in fiscal 2013 to grow its business” and continue its leadership role in the cloud computing industry.

Overall, we believe Salesforce will continue to seek out smaller acquisitions to fuel its long-term growth strategy, and allow it to better compete with top-tier rivals like Oracle and SAP AG (who have also been making acquisitions) in the high-growth cloud computing market. At the end of the latest quarter, Salesforce had about $1.7 billion in cash, cash equivalents and marketable securities to put towards future acquisitions, so the M&A frenzy in the cloud computing sector should continue.

Below, we highlight Salesforce’s purchases since January 2011, and detail how these acquisitions will benefit the company moving forward.

Last week, Salesforce said it's paying almost $70 million to purchase browser collaboration business GoInstant Inc., which allows people to surf the web with each other without having to download an extra plugin or software. The GoInstant acquisition will extend Salesforce’s capability to offer fully integrated, real-time social collaboration.
In early June, Salesforce agreed to buy Buddy Media, a social media marketing platform, for $689 million in cash and equity. Buddy Media enables its clients to listen, engage, gain insight, publish, advertise and measure social marketing programs. Buddy Medias’ top clients include Ford, Hewlett Packard, L’Oreal and Mattel, among others. Its social media solutions help Chief Marketing Officers manage social media campaigns, which is becoming an increasingly important aspect in brand building and awareness.
In December 2011, Salesforce agreed to acquire Rypple, a provider of social performance management applications, for $50.6 million. This acquisition marks Salesforce’s first step into human capital management.
In November 2011, Salesforce.com said it was purchasing Model Metrics, an implementer of mobile applications, for $66.7 million. With Model Metrics, Salesforce will add mobile and social expertise, allowing the company to further transform customers and empower its global partner ecosystem.
In September 2011, Salesforce.com acquired cloud provider Assistly for $58.7 million. Assistly provides an instant customer-service help desk built for the cloud.
In May 2011, Salesforce.com completed the purchase of Radian6, which helps companies monitor and engage with their customers via social media. Salesforce paid $336.6 million for Radian6, a Canadian cloud application vendor that provides customers with social media monitoring, measurement and engagement solutions.
In February 2011, Salesforce acquired Manymoon Corp. for $13.6 million in cash. Manymoon provides productivity and collaboration tools to web apps like Gmail and Google Apps, and allows Salesforce to branch out from its traditional customer relationship management (CRM) software.
In January 2011 Salesforce acquired Dimdim, a provider of online meeting solutions for business collaboration, for $37.1 million. Dimdim has created critical real-time communication technologies such as presence, messaging and screen sharing.
In January 2011 Salesforce.com completed the acquisition of Heroku for $216.7 million. Heroku provides a cloud platform for writing Ruby-based applications, and allows Salesforce to expand its capabilities in the public cloud services market

Salesforce introduces government cloud. In the federal sector, Salesforce recently unveiled its Government Cloud to accelerate government’s transformation for the social era. The Government Cloud will include a dedicated, multi-tenant instance of Salesforce’s cloud infrastructure that will allow U.S. federal, state, and local agencies to rapidly deploy the latest social and mobile technologies in compliance with FISMA requirements. The Government Cloud will also include AppExchange for Government, a new app marketplace for the public sector where government agencies can find, try and deploy cloud apps that meet their needs.

According to Deltek’s Federal Cloud Computing Services Outlook, 2012-2017 report, the demand for vendor-furnished cloud computing services by the U.S. government will increase from $734 million in fiscal 2012 to $3.2 billion in fiscal 2017, representing a compound annual growth rate (CAGR) of 34%.

Overall, we believe that Salesforce will continue to be among the market leaders in the cloud computing and social enterprise sectors, while using acquisitions to fuel its growth moving forward. With the federal cloud computing and social enterprise markets just beginning to develop, we expect Salesforce to benefit from the widespread adoption of these technologies by federal agencies over the next several years.

M&A Activity Holds Steady In 2Q: Cloud Computing And Analytics Drive Transactions

Fri, 06 Jul 2012 10:04:00 -0400

Mergers and acquisitions activity in the defense and government services sector held steady in the latest second quarter, and is expected to remain robust for the remainder of the year as larger firms continue to seek out smaller companies operating in hot sectors to help offset expected federal budget cuts.

Among the contractors we track, there were 43 deals either announced or completed during the latest second quarter, off slightly from 44 deals announced in last year’s second quarter, and up significantly from the 29 transactions announced in the first quarter of this year.

M&A activity in the second quarter was driven by four deals which had valuations of over $1 billion, including SAP’s $4.3 billion purchase of cloud-based applications provider Ariba Inc., and CGI Group’s $2.6 billion acquisition of rival Logica PLC, an Anglo-Dutch firm which provides consulting, outsourcing and IT services to governments and companies across Europe.

Other significant purchases in the latest second quarter included Microsoft’s $1.2 billion acquisition of business social network Yammer, and Microsoft’s purchase of more than 925 patents and patent applications from AOL for $1.1 billion. After the purchase, Microsoft later sold 650 of those AOL patents to Facebook Inc. for $550 million.

FIA Perspective:

Smaller deals in cloud computing and analytics fuel M&A activity in 2Q. During the latest second quarter, there were several M&A transactions announced in the cloud computing and big data/analytics sectors, and we expect these trends to continue moving forward.

On the cloud front, there were six deals reported in the latest second quarter which involved companies with cloud-related solutions, on par with the six cloud computing transactions announced in the first quarter of this year.

Notable deals (besides SAP/Ariba) include Dell’s purchases of Wyse Technology and Clerity Solutions Inc. earlier in the quarter, and Oracle Corp.’s purchase of Virtue, which operates a cloud-based social marketing and engagement platform, for $300 million. In another cloud-related transaction, Teradata agreed to acquire eCircle, which provides e-mail marketing and social media software in the cloud. This acquisition is expected to significantly enhance Teradata’s multi-channel marketing capabilities.

Overall, top-tier IT firms looking to expand their market share in the cloud computing sector is expected to continue moving forward, as the market is slated to see high-growth over the next several years. According to Deltek’s Federal Cloud Computing Services Outlook, 2012-2017 report, the demand for vendor-furnished cloud computing services by the U.S. government will increase from $734 million in fiscal 2012 to $3.2 billion in fiscal 2017, representing a compound annual growth rate (CAGR) of 34%. Given this expected growth, we expect top-tier IT firms to continue their foray into the cloud market, targeting smaller companies providing unique or distinctive solutions.

Elsewhere, M&A activity in the big data/analytics market was also strong in the latest second quarter, continuing its momentum from earlier in the year.

Always on the hunt for acquisitions in hot sectors, IBM seemed to have its eye on the analytics makret in the latest second quarter, making three acquisitions, including Varicent Software Inc., Vivisimo, and Tealeaf Technology Inc. IBM said it believes the analytics market presents a significant growth opportunity for the company with attractive profit margins.

Other notable deals in the analytics market in the latest second quarter included VMWare’s purchase of big data startup Cetas Software, Cisco’s acquisition of data analytics firm Truviso Inc., and CACI International’s buyout of Delta Solutions and Technologies Inc., which provides financial management and business analytics services to the federal government.

Overall, M&A activity in the big data/analytics market has been on the upswing over the past quarter or so, and we expect this trend to continue as top-tier IT firms continue to seek out small- and mid-tier firms providing unique or niche technologies within this hot sector.

Top-tier IT and contracting firms continue to lead the pack in M&A transactions. In the latest second quarter, technology titans such as IBM, Dell and Oracle continued to invest heavily in smaller companies in hot growth segments. IBM, Dell and Citrix Systems all made three purchases in the latest second quarter, while Oracle and Google each made two acquisitions.

Among the contracting heavyweights, Boeing acquired ISR provider Immedius, which provides software applications and services for managing and sharing information and learning content. Elsewhere, Northrop Grumman purchased M5 Network Security, an Australian provider of cybersecurity and secure mobile communications products and services, while General Dynamics picked up IPWireless Inc., which provides wireless broadband network equipment and solutions.

KeyW, LogRhythm and Palo Alto Networks Could Be Cyber M&A Targets

Thu, 21 Jun 2012 10:13:00 -0400

With the cybersecurity market is getting a lot of attention at the federal level these days and rapidly evolving, smaller firms decoding the next cyber threat are at the forefront of exciting changes taking place throughout the industry. At FIA, we are always analyzing the federal cybersecurity sector, and I personally have an interest in what’s going on in the mergers and acquisitions (M&A) market surrounding this high-growth market.

Overall, M&A activity in the defense and government services sector been somewhat lackluster this year, although deals in the cyber arena have kept pace despite the general slowdown. Within the cyber sector, we have seen six acquisitions (within our coverage universe) which we would classify as cyber-related, and we expect these deals to continue to as larger firms look to inorganic means of driving revenue growth in today’s challenging markets.

Considered a high-growth sector, cybersecurity will continue to be at the forefront of M&A activity over the next several years, and is a market many top-tier commercial and government IT firms will continue to look at for extending their growth in the future.

With that in mind, we believe there is still a long-list of smaller niche security firms which could be on deck as possible takeover targets. These firms include players with unique capabilities or specialties within the cyber market, such as KeyW Corp., LogRhythm, and Palo Alto Networks – we highlight each below.

While some of these cyber specialists have more commercial than government security business, we continue to believe that government is at the forefront of cyber adoption, driven primarily by the intelligence agencies. All of the above-mentioned firms could be attractive targets for larger IT companies looking to gain market share or enhance their footprint in security. Interested suitors could include tech titans such as IBM, Oracle, EMC and Hewlett-Packard, plus other top-tier firms like Dell, Cisco and Juniper Networks.

While government IT pure-plays like SAIC and CACI, or even the defense primes, could also have an interest in these smaller firms, we see them primarily focusing on customers in the intelligence agencies, and hence their acquisitions will most-likely focus on niche technology providers (like KeyW and other firms in the Ft. Meade area) for that cutting-edge client base.

With spending on information security expected to grow at almost double-digit rates over the next several years, and being somewhat immune to future spending and budget cuts, we expect government-wide, as well as agency-specific, cybersecurity initiatives to continue to present numerous opportunities for federal contractors for the foreseeable future, making smaller firms working on the next cyber threat a hot commodity in the government IT market.

Below we highlight the above-mentioned security firms and the larger IT companies which may find these smaller high-growth businesses attractive:

1. KeyW is a smaller niche firm which provides agile cyber superiority, cybersecurity and geospatial intelligence solutions primarily for U.S. government, intelligence, and defense customers. Over the past few years, KeyW has primarily grown through acquisitions, snapping up 13 businesses since its inception, while expanding its list of clients and capabilities into new and adjacent markets.

In the latest first quarter, KeyW saw its revenues jump 34% to $55.8 million, while noting that its “pipeline of new opportunities looks very promising in terms of new proposal activity, growth in existing programs, and opportunistic acquisitions." KeyW CEO Leonard Moodispaw also said the firm is progressing on its 'horizontal path' effort into the commercial markets, while disclosing that the company’s “investment in internal R&D have opened doors to significant new business potential.”

Overall, KeyW’s core cyber capabilities and relations with the intelligence community make it an attractive takeover target for a larger IT firm or defense contractor looking to gain market share or expand its addressable market in the area of cyber intelligence (which has high barriers to entry and is difficult to penetrate). Potential suitors could include Northrop Grumman, Boeing, Lockheed Martin, SAIC or CACI, along with tech-giants such as IBM, Dell or EMC.

2. LogRhythm provides solutions in log management and SIEM 2.0, while delivering visibility, insight and situational awareness needed for cyber threat defense, detection and response, compliance automation and assurance, and operational intelligence and optimization.

LogRhythm analyzes and manages network, host, file and user activity data in a highly scalable, integrated solution. Its unique log management and SIEM 2.0 solution detects the previously undetectable, and delivers powerful forensics, while providing actionable intelligence. LogRhythm provides its solutions and operational intelligence to Global 2000 organizations, government agencies and mid-sized businesses worldwide.

Within the federal space, LogRhythm recently announced that its SIEM 2.0 platform has received a Certificate of Networthiness from the U.S. Army. As a result, Department of Defense (DoD) organizations that use the Army Enterprise Infrastructure (AEI) can now deploy LogRhythm to meet their security and compliance needs. LogRhythm is one of only two SIEM vendors – and the only independent provider - with CoN accreditation.

Within the SIEM space, all of the major niche providers have been acquired over the past several years, with the exception of LogRhythm. Acquisitions include Hewlett-Packard purchasing ArcSight, IBM buying Q1, and TIBCO purchasing LogLogic, among others. This places LogRhythm at the top-of-the-list among smaller providers in the SIEM market, and current LogRhythm partners such as Oracle, Cisco, and Dell could all have an interest in acquiring the company.

3. Palo Alto Networks is a next-generation security provider with a platform that allows enterprises, service providers, and government entities to secure their networks and safely enable the increasingly complex and rapidly growing number of applications running on their networks.

The core of Palo Alto’s platform is its Next-Generation Firewall, which delivers application, user, and content visibility and control integrated within the firewall through its proprietary hardware and software architecture. The company’s platform offers a number of compelling benefits for its end-customers, including the ability to identify, control, and safely enable applications while inspecting all content for all threats in real time.

As of April 30, Palo Alto had more than 7,750 end-customers in more than 100 countries, compared with 1,800 at July 31, 2010.

For the nine month period ended April 30, 2012, Palo Alto’s revenues skyrocketed 129% to $179.5 million, compared with revenues of $78.4 million in last year’s comparable period. At the same time, the company generated net income of $5.3 million, swinging from a net loss of $6.5 million in last year’s nine month period.

Currently, Palo Alto is in the process of going public via an initial offering of its common stock. Despite its aspirations of going public, Palo Alto could still make for an attractive takeover target with its significant top-line growth and growing list of end-customers. Palo Also would most-likely draw interest from the usual list of top-tier IT firms who have been making cyber acquisitions over the past several years – these include IBM, HP, Dell, Cisco and Intel, among others.

Sourcefire Outperforming In Cyber Market; Could Serve As Model For Smaller Contractors To Follow

Thu, 14 Jun 2012 13:16:00 -0400

At FIA, we believe Sourcefire Inc., a cybersecurity provider with a comprehensive portfolio of solutions, will continue to increase its federal business while expanding its capabilities in the growing cyber market. The information security market continues to be one of the most attractive growth segments within the federal IT space, and is expected to grow from $9.2 billion in 2011 to $14 billion in 2016, representing a CAGR of 8.8%, according to Deltek’s Federal Information Security Market, 2011-2016 report.

In 2011, Sourcefire generated approximately $34.8 million (21%) of its total revenue from the U.S. government, including the Department of Defense and various intelligence agencies. This compares with $32.7 million in revenues from the U.S. government in 2010, and $30 million in revenues in 2009.

FIA Perspective:

Sourcefire seeing dramatic top-line growth with diversified portfolio. In the latest first quarter, Sourcefire’s revenue shot up 50% to $46.3 million, compared with $30.8 million in last year’s first quarter, reflecting 60% growth in revenue from the company’s federal government sector. In addition, Sourcefire saw its commercial business revenue rise 28% to $20.8 million, while international revenues skyrocketed 87% to $15.7 million.

Sourcefire said its federal government business generated $9.8 million of revenue in the latest quarter, up 60% over the year ago quarter. The company noted that earlier funding of federal agencies versus what the firm experienced last year seemed to stabilize the procurement process, and as a result, Sourcefire saw greater deal flow over last year’s comparable quarter.

Looking ahead, Sourcefire believes it can grow its business by 25% on the top line in 2012, reflecting a growing awareness and demand for cyber security solutions like its Next-Generation IPS, the expanding size of the firm’s total addressable market, and a more stabilized federal spending environment through at least the remainder of the current federal fiscal year. Sourcefire noted that it now expects its federal business to show a 500 basis point to 600 basis point improvement for 2012.

Sourcefire could serve as model for smaller contractors looking to branch out. With Sourcefire sporting a nicely-diversified list of capabilities and solutions across the commercial, government and international markets, the firm’s success could serve as a blueprint for other small contractors in the federal cyber sector to emulate moving forward. In the latest quarter, Sourcefire’s commercial business accounted for 44.9% of the company’s overall revenues, while international and government business checked in at 33.9% and 21.2%, respectively. In addition, Sourcefire also has a nice blend of product and service revenues, which stood at 59% and 41% of total revenues, respectively.

Over the past few years, Sourcefire has continued to develop new security products and services, while adopting an “Agile Security” vision in order to evolve with today’s rapidly changing market. In 2011, Sourcefire launched two innovative solutions into two adjacent markets - next generation firewalls and advanced malware protection. This effort is expected to increase Sourcefire’s addressable market from $1.7 billion to more than $10 billion over the next four years, the company noted.

Sourcefire also continues to grow its international presence, while expanding its relationships with partners, resellers, distributors, and government integrators. In 2011, Sourcefire launched its first North American distribution partnerships with recognized channel leaders, Synnex and Computerlinks, and is now making investments in these partners with the objective of increasing its percentage of channel-influenced revenue. The company also continues to add members to its distribution network. At the end of 2011, Sourcefire had agreements with 576 third parties for the distribution of its products, compared with 339 at the end of 2010.

Overall, we believe Sourcefire’s strategy to broaden in reach while expanding its current capabilities could be a nice model for smaller federal contractor’s to emulate moving forward. With shrinking budgets government-wide and increasing competition from larger players, smaller contractors may need to look outside-the-box, and seek cyber opportunities in commercial and international markets to continue their growth over the next few years.

Also helping smaller contractors is a renewed emphasis on supporting and expanding the role of small businesses in government contracting, as Deltek discloses in its recent Small Business Federal Contracting: Trends and Drivers? report. The report discusses how federal agencies are participating in interagency groups to focus on communicating best practices and proven strategies for increasing small business utilization across multiple agencies, and how small business can achieve success going forward.

Cybersecurity is getting attention at the highest levels, as contractors jockey for market share. According to Deltek’s Federal Information Security Market, 2011-2016 report, cyber attacks are up 650% since 2006, as attackers continue to go after targets to disrupt government operations and U.S. critical infrastructure. However, while agencies continue to make incremental progress toward securing systems and data, environmental complexity, technical challenges, and workforce shortages have inhibited the federal government’s pace in implementing a comprehensive and cohesive national cybersecurity strategy.

While the strategic direction for cybersecurity seems to be hazy at the moment, the Obama Administration has clearly sated that cybersecurity a top-priority. As a result, almost every major IT firm is jockeying to contend for current and upcoming cyber-related opportunities, and we expect these opportunities to multiply over the next several years.

Sourcefire could be seen as an attractive takeover target. Since Sourcefire is a proven supplier with numerous government customers, it could be an attractive takeover target for a top-tier IT firm looking to expand its cybersecurity footprint. IT contractors typically use strategic acquisitions to gain a foothold in growing markets, while broadening their offerings, and supporting organic growth.

Overall, mergers and acquisitions activity in the cyber arena has continued to be robust this year, and we expect this trend to continue throughout 2012. Notable deals in the cyber arena include Dell’s purchase of SonicWall, and ManTech’s acquisition of HBGary. Juniper Solutions has also been active on the cybersecurity front, acquiring Mykonos Software, while Salient Solutions has purchased ATS Corp. to enhance its cyber-related capabilities. We believe that M&A activity in the cyber arena will continue to be strong for the remainder of the year, as larger contractors look to expand their expertise in this growing sector while recognizing the vast number of smaller firms already working on the next cyber threat.

Our Take:

We think that Sourcefire has done a great job over the years in building its comprehensive portfolio of security solutions, while expanding into new and adjacent markets. We also like that Sourcefire has a well-diversified cyber portfolio split among the commercial, international and government markets, and close to an even split between its product and service revenues. Despite a tightening budget environment and competition from larger and better-funded rivals, we believe Sourcefire has what it takes to be successful in the ultra-competitive cyber market, and will continue to gain market share within this high-growth industry over the next several years.

Kratos Defense & Security: A Mid-Tier ISR Firm Making Big Acquisitions In Hot Markets

Thu, 24 May 2012 09:52:00 -0400

With the Intelligence, Surveillance and Reconnaissance (ISR) and cybersecurity markets poised to receive federal funding increases over the next several years, the small- and mid-tier providers of these unique technologies are at the forefront of exciting changes taking place within the evolving federal landscape.

With this in mind, FIA is always monitoring these changes, and I personally have an interest in what’s going on in the Mergers and Acquisitions (M&A) market surrounding these hot sectors.

Within these markets, one company which has been making noticeable moves over the past year is Kratos Defense & Security Solutions Inc., a mid-tier defense contractor which has been acquiring other mid-tiers to expand its addressable markets in the areas of ISR and cybersecurity. Over the past year, Kratos has been among the most active mid-tier acquirers in the federal M&A market, snapping up small-and mid-tier players in hot markets to expand its list of offerings.

Based in San Diego, Kratos is a specialized national security technology firm providing mission critical products, services and solutions for U.S. national security priorities. Its core capabilities include sophisticated engineering, manufacturing, system integration and test and evaluation offerings for national security platforms and programs. The company’s principal products and services are related to the growing C5ISR market.

FIA Perspective:

Kratos targets ISR and cyber firms in year-long shopping spree. Over the past year or so, Kratos has made five acquisitions in an effort to expand its portfolio, with a particular emphasis on firms providing ISR and cyber capabilities. Overall, M&A activity in the ISR and cyber markets has been active this year, and we expect this trend to continue as top-tier defense contractors continue to seek out small- and mid-tier firms providing unique or niche technologies within these hot sectors.

Below, we highlight Kratos’ purchases over the past year, and detail how these acquisitions will boost the firm’s capabilities moving forward:

Earlier this month, Kratos said it would acquire drone maker Composite Engineering Inc. for $155 million. California-based CEI makes aerial target drone systems and composite structures primarily for U.S. defense agencies. In 2011, CEI booked revenue of $94 million, and the firm has a backlog of about $160 million, with a qualified bid pipeline of over $1 billion.
In December 2011, Kratos also acquired selected assets of a critical infrastructure security and public safety system integration business for $20 million. The critical infrastructure business designs, engineers, manages and maintains specialty security systems at some of the most strategic and critical infrastructure locations in the U.S.
In November 2011, Kratos purchased SecureInfo Corp., which offers strategic advisory, operational cybersecurity and cybersecurity risk management services, for $20.3 million cash. SecureInfo is a leader in the rapidly evolving fields of cloud security, continuous monitoring and cybersecurity training. Customers include the Department of Defense, the Department of Homeland Security and large commercial customers.
In July 2011, Kratos acquired Integral Systems Inc. in a transaction valued at $241 million. Integral specializes in developing, managing and operating secure communications networks, both satellite and terrestrial, as well as systems and services to detect, characterize and geolocate sources of radio frequency interference. Integral’s customers include U.S. and foreign commercial, government, military and intelligence organizations.
In March 2011, Kratos also purchased Herley Industries Inc. for $272.5 million. Herley’s products represent key components in national security efforts, as they are employed in mission-critical electronic warfare, electronic attack, electronic warfare threat and radar simulation, command and control network, and cyber warfare/cybersecurity applications.

Overall, we believe Kratos sees the significant potential in the ISR and cyber markets, and is enhancing its portfolio to win market share within these high-growth segments. We believe the above acquisitions exhibit Kratos’ strong push into these markets, and will allow the firm to better compete with larger and more-established contractors going forward.

Kratos reports solid top-line results in 1Q. In the latest first quarter, Kratos saw it revenues jump 75% to $215 million, compared with $122.8 million in last year’s comparable quarter, reflecting the recent acquisitions of SecureInfo, Integral and Herley (which had combined revenues of $100.5 million).

At the same time, Kratos posted a net loss of $3 million, or 9 cents per share, compared with a loss of $3.5 million, or 17 cents per share, in the 2011 first quarter. At the end of the latest quarter, Kratos' had a total backlog of $1.1 billion, and a qualified bid and proposal pipeline of around $4 billion. Sales to the U.S. government accounted for 77% of the company’s total revenue in the latest quarter.

Looking ahead, Kratos believes that spending on modernization and maintenance of defense, intelligence and homeland security assets will continue to be a national priority. It also noted that its business is “aligned with mission critical national security priorities, particularly in the areas of Unmanned Aerial Vehicles (UAVs), cybersecurity, ballistic missile defense, space programs and science and technology efforts,” where the proposed defense budget for fiscal 2013 has actually allocated increased funding.

Overall, we like that Kratos is being aggressive with its M&A strategy to broaden its client base and expand its offerings, but think the company may face difficulties in competing with larger, more well-established defense contractors. Within the federal market, we expect mid-tier contractors to face increasing challenges in winning new business, as more RFPs are calling for past performance metrics as prime contractors. This places mid-tiers conducting most of their work as subcontractors in a precarious bidding position versus their top-tier rivals, and will make it difficult for them to contend for prime opportunities versus these larger companies moving forward.