REPORT FROM THE FRONT: FederalDefense Technology M

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REPORT FROM THE FRONTFederal/Defense
Technology MA Whos Buying, Whos Selling, and
Why Conference Examining the Economic Impact
of SBIR and STTRMarch 18, 2004Paul Serotkin
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Today..

• The Federal/Defense Technology Company Universe
• Current MA Environment
• Seller/Buyer Profiles
• MA Valuation/Deal Pricing in the Federal/Defense
  Technology Sector

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Minuteman Ventures LLC

• Investment Bank focused entirely on
  Federal/Defense Technology Sector
• Work with private firm owners approaching MA as
  either 1) a first time strategic growth path, or
  2) a liquidity event
• Founder involved with small business trade
  association in effecting passage of SBIR in 1982
• Work with private and public companies in
  transacting corporate transactions

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The Federal/Defense Technology Company Universe

• Under 100m in revenue, often under 50m
• Closely held, few shareholders, with perhaps an
  ESOP holding a minority position and some
  option-holders typically no outside capital
• Geographically strong in two, possibly three
  locations
• Having true market presence at two to three
  agencies
• Widely ranging services, systems and solutions
  across a spectrum demarcated by degree of
  commoditization, classified/intel work and
  technology differentiation
• - System engineering/integration, training,
  modeling/simulation, network services, technology
  RD, legacy migration, database maintenance,
  logistics, software application development,
  program management/acquisition support,
  systems/platform systems, IT/communication
  technology
• Usually at least five years old, many times 15
  years duration
• Founder often involved, at least in ownership, if
  not operations
• Could have some SBSA/8a work remaining

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Government Technology Firms- Industry
Stratification, By Revenue, FY02
Source Eagle Eye Publishing/Government Services
Insider
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Favorable MA Environment for Federal/Defense
Technology Firms

• Supportive Capital markets- 2bn in new issues
  last 18 mos. aggregate 50 increase in03
  enterprise values
• Inexpensive debt capital, with attractive lending
  ratios
• Government infusing more complex technology into
  processes and warfare
• More outsourced federal functions
• Public sector firms valued on basis of 15-20
  annual growth

• Good visibility into future revenue, earnings and
  cash flow
• Modernization of legacy government IT systems
• Steady growth in government IT budget strongest
  in intel/defense and homeland security
• LEADING TO Robust MA pricing market values
  at/near historic highs

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Reasons Behind the Robust Government MA Market

• Record levels of Federal/Defense Technology MA
  Transactions. Why?
• PART FEAR FACTOR, SECTOR MATURITY, CLASSIC MAKE
  V. BUY DECISION
• Sector Rotation Defense in vogue today - Will
  it be tomorrow?
• IPO Buyer Class of 02 will this potential
  buying class be smaller in a few years, i.e.,
  Veridian, Titan already sold
• Active mid-tier buyers (50m-250m) strong
  private equity interest (success stories
  Anteon, SI, Veridian)
• Well-positioned firms (intel, security, C4ISR,
  network-centric warfare, law enforcement, public
  safety) yield MA premium
• Attractive tech firms supporting homeland
  security and 3-letter agencies
• Large platform companies diversifying into
  services
• Uncertainty in market GWAC restructuring, small
  business recertification, performance-based
  contracts, base closure, War on Terrorism and
  deficits affecting civilian agency budgets

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Seller Transaction Profile Defense/Federal
Technology(By Seller Size)

• Observations
• (70 transactions since Q4 02)
• Mostly smaller companies 8 of 10 with revenue
  under 50m
• Ready willingness by large cos. to buy smaller
  ones

lt20m
100m 250m
50m 100m
500m
20m - 50m
250m - 500m
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Buyer Transaction Profile Defense/Federal
Technology (By Acquirer Size)

• Observations
• (70 transactions since Q4 02)
• Major SIs very active
• Smaller companies selectively transacting deals
• Mid-sized buyers using MA to add strategic
  pieces

100m-250m
50m-100m
500m
lt 50m
250m-500m
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Mid-Tier Companies Growing, Robust Acquirers

• Profile 50-250m firms
• Government is largest if only customer
• Experienced organic growth and successfully
  integrated previous acquisitions
• Need to quickly add strategic pieces
• Some backed by private equity
• See path to become 500m companies
• Are growing or want to grow faster than
  government technology market
• Lenders educated on government MA, cost of debt
  capital still low
• Promise of IPO strategy and size both important
• Immediate addition of clearances, key managers,
  new customers
• Strong case for buy v. make environment

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Tier 1 Buyers
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Tier II Buyers
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Tier III Buyers
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Tier IV Buyers
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Whos Buying Whom
SELLER Under 20m
SELLER 20m - 50m
BUYER
Under 20m 100m-250m
20m-50m 250m-500m
50m-100m 500m
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Whos Buying Whom (contd)
SELLER 50m-100m
SELLER 100m-250m
SELLER 500M
100
100
BUYER
Under 20m 100M-250m
20m-50m 250m-500m
50m-100m 500m
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Federal/Defense Technology MA Valuation
Size/Specialty Matters
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MA Valuation
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Technology Makes a Difference in Federal/Defense
IT Transactions
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The Value Table 10 Factors in Determining
Federal/Defense Technology Company Value

• Contract Alignment with the Mission de Jour-
  Technology, key customers
• Cleared Employees
• Recaptured Business
• Prime Contract Awards
• Small Business Set Aside (SBSA) Awards

• Weak Alignment - 1Strong Alignment - 10
• 0-20 Employees Cleared - 120-60 Cleared 60
  or Over Cleared - 10
• 0-20 Recompete Revenue - 120-50 Recompete 50
  or Over Recompete - 10
• 0-20 Prime Contract Revenue - 120-70
  Prime 70 or Over Prime - 10
• 70-100 SBSA Revenue - 130-70 SBSA 30 or
  Under SBSA - 10

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The Value Table 10 Factors in Determining
Federal/Defense Company Value (contd)

• 1-3 years - 14-6 years 7-10 years - 10
• 60 revenue from 1 contract - 125-60 less
  than 25 - 10
• 50-100 rev. from 8(a) - 115-50 from 8(a) Less
  than 15 from 8(a) - 10
• Lightly regarded management - 1Highly regarded
  management - 10
• 0-7 compounded ann rev. growth - 18-15
  growth 15 growth - 10

• Time in Business
• Contract Concentration
• 8a Revenue
• Competent Management
• Sustained Revenue Growth

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Conclusions

• Federal/Defense Technology MA Market remains
  robust
• Buyers come from all size firms Mid-tier firms
  stepping up
• Technology advancement, infusion can be true
  pricing discriminator
• MA pricing gradation based on size,
  differentiators
• Consolidation figures to continue for some period

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Contact Data

• Paul Serotkin
• President
• Minuteman Ventures LLC
• 781 750 8065
• 781 254 7267 mobile
• paulserotkin_at_minutemanventures.com
• www.minutemanventures.com