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Mid-Tier Defense MA Whos Buying, Whos
Selling, and Why March 10, 2004Paul
Serotkin
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Minuteman Ventures LLC

• MA Advisory Firm Focused on Federal/Defense
  Technology Sector Entrepreneurial Investment
  Banking
• Work with private firm owners approaching MA as
  either 1) a first time strategic growth path, or
  2) a liquidity event
• Founder headed MA Departments at Various
  Federal/Defense Companies AverStar, Pacer,
  Titan (subsidiary CFO)
• Firm personnel are entrepreneurs, founders and
  former senior executives with deep experience in
  the federal tech sector

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Today..

• Mid-Tier MA Environment
• Seller Rationale
• Seller/Buyer Profile
• Stratification of Acquirers buying Mid-Tier
  Companies
• Deal Pricing
• The Value Table

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The Small/Mid-Tier Defense Technology Company
Universe

• Typically..
• Closely held, few shareholders, with perhaps an
  ESOP holding a minority position and some
  option-holders
• Geographically strong in one, possibly two
  locations
• Mainly serving two, perhaps three customers at
  the services branch level, with diversified
  contract base within that customer set
• Widely ranging services - SE/SI,
  training/simulation, managed network services,
  legacy migration, database maintenance, system
  modeling, software application development,
  PM/acquisition support
• Usually at least five years old, many times 15
  years duration
• Founder often involved, at least in ownership, if
  not operations
• Usually have some SBSA/8a work remaining, or
  weaning themselves from these programs
• Little, if any, outside ownership, or equity
  investment from third parties
• Under 50m in revenue, but comments pertain to
  100-150m firms

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Favorable MA Environment for Small/Mid-tier
Defense Technology Firms

• Supportive Capital markets- 2bn raised in new
  issues over last 18 months
• Transitioning federal workforce
• Bush Administration stressing IT outsourcing for
  government
• Good visibility into future revenue and earnings,
  stable cash flow
• Public GTS firms valued on basis of 20 Y-O-Y
  growth

• Half of government IT outsourcing work performed
  by under 100m firms
• Modernization of legacy government IT systems
• Steady growth in government IT budget
• LEADING TO Robust MA pricing market values at
  highs

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Why Mid-Tier Companies Have Been Selling

• Sector Rotation Defense in vogue today - Will
  it be tomorrow?
• Private company MA Market values track public
  valuation
• 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) looking at
  MA as growth platform
• Well-positioned firms (intel, security, C4I,
  unmanned vehicles, smart munitions, integrated
  battlefield systems) warrant MA premium
• Interest from large SIs in smaller, tech-rich
  firms that support homeland defense and 3 letter
  agencies
• Uncertainty in market GWAC restructuring, small
  business recertification, performance-based
  contracts, DHS contract inclusion (SPIRIT), Base
  closure, possible Administration change
• High visibility of future cash flows and growth
  for industry
• Private equity remains an active capital source
  in federal market

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Seller Transaction Profile Defense/Federal IT

• 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 IT
(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 Buyers The New Breed

• Profile 50-250m firms
• Government is largest if only customer
• Experienced organic growth and successfully
  integrated previous acquisitions
• 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 still out there strategy and size
  both important
• Immediate addition of clearances, key managers,
  new customers
• Strong case for buy v. make environment
• Seller inventory plentiful (see next slide)

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GTS Industry Stratification, By Revenue, FY02
Source Eagle Eye Publishing/Government Services
Insider
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Large Corporate Buyers (of Mid-Tier
Defense/Federal IT Technology Firms)
Company Status Revenue ( billions) Recent Mid-tier Transactions
SAIC Employee-owned 6.5 Atlantic Coast, EMA
Anteon Public 1.0 Information Spectrum
Boeing Public 50.5 Conquest
BAE Systems Public 18.2 Mevatec
Perot Systems Public 1.4 ADI, Soza
Northrop Grumman Public 28 XonTech
AMS Public .9 Vredenburg
SRA Public .5 Orion Scientific
CACI Public .9 C-CUBED
General Dynamics Public 16.6 Digital System Resources
L-3 Public 4.9 Aeromet
EDO Public .4 Adv. Eng Research.
Raytheon Public 19.4 Solipsys
Lockheed Martin Public 31.6 Orincon
Mantech International Public .7 Integrated Data Systems
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Mid-Tier Buyers Level 1
Company Status Revenue-03 Recent Transactions
SI International (SINT) Public 170m MATCOM
Wireless Facilities (WFII) Public 230m HTS
MTC Tech. (MTCT) Public 175m Vitronics, ICI
Dynamics Research (DRC) Public 245m Andrulis, HJFord
DigitalNet (DNET) Public 330m User Technology Associates
PEC Solutions (PECS) Public 178m Vector Research
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Mid-Tier Buyers Level 2
Company Status Revenue Recent Transactions
ITS Services Private 200m SEA
NCI Private 136m Scientific Engineering Solutions
Sytex Private 275m MacAuley-Brown
Stanley Associates Private 190m Fuentez Systems
STG Private 170m Decision Systems Tech.
Alion Science and Technology Private 200m Innovative Tech. Solutions
ICF Consulting Private 160m 2 Arthur D. Little units
RCI Private 274m Innerbase Technologies
American Systems Corp. Private 175m Business Plus corp.
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Mid-Tier Buyers Level 3
Company Status Revenue Recent Transactions
FC Business Systems Private Under 100m AmerInd
Innovation Technology Appl. Private IT Specialists, DKCS
Management Systems Designers, Inc. (MSDI) Private Kathpal Technologies, ClearBrook Solutions
Indus Corporation Private --
SFA Private The Analysis Corp.
Axiom Resources Private Keymind
CHM Private ECI
Calibre Systems Private --
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Mid-Tier MA 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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Mid-Tier MA 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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MA Valuation Size/Specialty Matters
Category (by revenue) Transaction Value -Baseline Size Premium (Relative to baseline)
Under 25m 5-6X EBITDA - - -
50m 1.2x
100m 1.5x
Specialist Firms (size irrelevant) 1.5x-plus
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The Value Table 10 Leading Factors in
Determining Defense Company Value

1. Contract Alignment with the Mission de Jour
2. Cleared Employees
3. Recaptured Business
4. Prime Contract Awards
5. 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 Leading Factors in
Determining 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

1. Time in Business
2. Contract Concentration
3. 8a Revenue
4. Competent Management
5. Sustained Revenue Growth

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Conclusions

• Federal/Defense MA Market remains robust for
  under 100m defense companies
• Buyers come from all size firms Mid-tier firms
  stepping up
• 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