The sale of a business is the moment when an owner and a management team are rewarded for many years of hard work. Mergers and acquisitions, the process of businesses being sold and bought is basically the life blood of any entrepreneurial region, and our region is one of the hotbeds for emerging acquisitions activity in the United States, and it does drive our economy.
To talk about recent trends, and what’s going on in the world of mergers and acquisitions, Anita Antenucci, senior managing director of Houlihan Lokey. Houlihan Lokey is a national firm that specializes in merger and acquisitions and corporate restructuring, and it has a big presence here in the D.C. region, So she’s got her fingers very much of the pulse of this important part of our economy. Anita, thanks for joining us.
ANTENUCCI: Thanks for having me here.
ABERMAN: Well you are always busier than a one-armed paper hanger, as they say. What have you been up to recently, what kind of deals have you been doing, and what we learn about the current state of the market?
ANTENUCCI: Well, the current state of the market is as highly valued as it has been in, really, the history of this consolidation of government services, aerospace defense companies that’s been going on since more or less the end of the Cold War. We have seen values climb as a multiple of cash flow–which is how companies in the sector are valued–to over twelve and a half times average for the public companies in this region. And that is even higher than it was, really, at the peak of 2007-2008 spending before the Budget Control Act.
ABERMAN: So what you’re getting at there–the twelve half times–it’s a metric you’re measuring against earnings, or revenues?
ANTENUCCI: People in this sector typically look at cash flow, or EBITDA as a proxy for cash flow. So when you hear people talk about twelve and a half times, they mean times EBITDA of those companies.
ABERMAN: So what that means is that, if I’m not financially inclined, and so forth, what you’re telling me is that right now, buyers have more demand to buy these type of companies, than any time in recent memory?
ANTENUCCI: You’ve nailed it. Really, mergers and acquisitions are driven by the supply and demand of companies interested in building their skills, their customer presence, and their capabilities by acquisition. So, supply and demand, you have a seller’s market when there is more demand than there are companies that are looking to sell and liquidate their investments, and right now we have really, very very strong public companies in this area, with strong balance sheets and a real desire to grow their capabilities for what they think is going to be some real tailwinds in the market.
ABERMAN: So what’s fascinating about this, to me, is that if you talked with the uninformed person who talks about business or entrepreneurship in this region, they don’t necessarily talk about government services at all, or it’s seen as sort of a less important part of the economy. But yet, what you’re telling me is, it’s one of hottest parts of our economy. And by the way, it’s also where more wealth gets created than anywhere else.
ANTENUCCI: It is really D.C.’s hometown industry in a lot of ways, government itself and the services sector in particular, because so much of what the employment base and government contracting in this area is doing is supplementing government staff, literally on-site with the agencies, or in off-premises support roles, whether that’s information technology, software design, engineering support, the employment base is enormous, and the wealth creation, not just of all of those people working in the industry, but of all of the entrepreneurs that have come out of that industry, to start their own companies and build their own unique strategies in the sector, that M&A market has really driven enormous wealth creation among that entrepreneurial base.
ABERMAN: Now the other thing that I hear from folks, with respect to technology, is that the Pentagon and and other agencies are much more interested in product-based innovation than they used to be. You know, they opened up offices in California and so forth–are you seeing more interplay now, mergers and acquisitions between smaller product-based companies and the government services companies? How is that playing out?
ANTENUCCI: Very definitely, there has been a real focus over the last handful of years, and especially under Ellen Lord in this administration, on getting innovation to the customer, in particular, to the warfighter customer, much more quickly than we have been able to do that through the federal acquisition regulations and other bureaucracy that have come to slow down that process.
So there’s a real look by this administration, and the the one immediately preceding it, to find ways of bringing that innovation to the battlefield, or to the customer, in the federal agencies more quickly, and they do that through the use of other transactional authorities or reform in the acquisition processes, and they do that through small business innovative research programs and they do that through DARPA, which is the Defense Department’s R&D organization, supporting both entrepreneurs and very big companies in early R&D that would have application. But it is a real focus for the last handful years, and I think it’s a really essential one, because if you look at what’s made, in particular our national security strength, dating back to the 1940s, 50s, and 60s, it was the ability to harness capitalism and to take the innovation and the financial support that our capitalist system gives to good ideas and puts them to use for the government needs.
And, on one hand, we need the federal acquisition regulations to make sure that’s done in a fair in balanced way, and we treat taxpayers’ money very carefully. And on the other hand, we need to keep that process moving smoothly, and to make sure that we don’t curtail all of the power of entrepreneurism and the capitalist system in this country from delivering greater technology at greater speed, greater innovation to our government.
ABERMAN: So you’re an M&A. I used to be an M&A lawyer, I was a venture capitalist for a while. When I compare this region to Silicon Valley, everybody pretty much is building a company to try to sell it to Google. Everybody knows the big acquirers, and there’s a rapid and active M&A market where everybody’s vertically integrated. You’re telling me that, here in town, we have an incredibly dynamic M&A market, and yet our startup entrepreneurs, a lot of these accelerators around town are trying to grow companies to sell to Google. How do we get them, how do we get this ecosystem more tightly integrated, do you think?
ANTENUCCI: That’s a really good question. I think the most important thing is for there to be ways for the government to buy good ideas more quickly. And I used the geeky term “other transactional authority”–that is a way that the special forces have, for a very long time, been able to get their hands on the technology they need, very very quickly. To be honest, the war was a good incubator for technology, because there was so much support for getting the important technology to the battlefield immediately.
I’ll give you an example: there’s a company based out by Dulles Airport called Niitek, and Niitek developed a ground penetrating radar, which was used to find IEDs underground. They were able to put a prototype in the hands of the U.S. Army in Iraq, and the U.S. Army didn’t want to give it back. It was so essential to their mission. They were able to get a production program up and running, and delivering end products to their customer, in under a year. That’s actually a pretty rare story. Most big government programs take five, ten, sometimes even twenty years to get going. So, finding ways to shortcut without losing the kinds of controls that are necessary, but to shortcut that path to market, if you will, then in this case, the market is use in a federal agency, or on the battlefield. That’s the most important requirement.
ABERMAN: Thanks for coming and sharing your insights. I must tell you, I knew that the M&A market was hot. I didn’t know it was that hot.
ANTENUCCI: It’s a good time to be a seller.
ABERMAN: I hope you’re listening out there, entrepreneurs, get to work! Anita, thanks for joining us.
ANTENUCCI: Thank you.