Magic of the MidTier: M

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Magic of the Mid-Tier MA as a Growth
Strategy for Mid-sized Federal and Defense
Technology Services CompaniesSeptember 21,
2004Presented by Paul SerotkinInvestment
Banking for Entrepreneurial Companies
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Today..

• MA Environment - Defense Technology Services
• MA as Strategic Tool for Mid-sized Companies
• Creating and Defining Value/Deal Pricing

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• MA Environment Defense Technology Services

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Why an Active MA Market in Federal/Defense
Technology Services

• Sector Rotation Defense in vogue today - Will
  it be tomorrow?
• Private company MA multiples at close to
  historic highs
• IT outsourcing continues apace, with substantial
  amounts going to under 100m firms
• Industry awash in capital -2bn raised from IPO
  and debt offerings since 2002 internal cash flow
  very strong
• Cost of capital remain low
• Public companies valued on basis of 20-25
  top-line growth, but government outsourcing
  growth under 10
• Mid-tier buyers able to compete with larger firms
  on price, MA integration, benefits, workplace
  culture
• Well-positioned firms (intel, security, C4ISR,
  network-centric warfare) yield MA premium
• Uncertainty in market GWAC restructuring, small
  business recertification, performance-based
  contracts, Base closure
• Private equity helps to lubricate MA market

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Seller Transaction Profile Defense/Federal IT

• Mostly smaller companies 8 of 10 with revenue
  under 50m

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

• Major SIs very active
• Smaller companies selectively transacting deals
• Mid-sized buyers using MA to add strategic
  pieces

50m-100m
100m-250m
lt 50m
500m
250m-500m
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Large Corporate Buyers Tier 1
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Mid-Tier Buyers Tier 2
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Mid-Tier Buyers Tier 3
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Mid-Tier Buyers Tier 4
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• MA as Strategic Tool for
• Mid-sized Companies

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Mid-Tier Federal/Defense Technology Services
Buyers - Tier 2

• Profile 150-500m firms
• Publicly traded, several having completed IPO in
  last two years
• Federal Government is largest if only customer
• Valued by capital markets on basis of top line
  20-25 growth
• See path to become 1bn companies
• Typically have primary MA role on staff
• Cash flow strong, considerable debt capacity,
  prospect of secondary offering

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Mid-Tier Federal/Defense Technology Services
Buyers - Tier 3

• Profile 50-150m firms
• Privately held
• Federal Government is largest if only customer
• Experienced organic growth and may have
  successfully integrated previous acquisitions
• Some backed by private equity
• Serial entrepreneurs reinvesting Lau, Paravant,
  BTG
• PEG interest growing, new players emerging
  e.g., Arlington Capital, Paladin Capital
• See path to become 100m-1bn companies
• Are growing or want to grow faster than
  government technology market
• Deploying outside advisor to support MA
  initiative
• Internal part-time use of senior executive for
  MA

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Who the Mid-Tier is Acquiring the
Federal/Defense Technology Services Universe

• Closely held, few shareholders, with perhaps an
  ESOP holding a minority position
• Geographically strong in one, possibly two
  locations (three at best)
• Mainly serving two, perhaps three customers at
  the services branch level, with diversified
  contract base within that customer set
• Broad IT services System engineering/integration
  , training/ simulation, network services, legacy
  migration, DB maintenance, logistics, modeling,
  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
• May have some SBSA/8a work remaining, or weaning
  themselves from these programs
• Little, if any, outside ownership, or equity
  investment from third parties
• Under 100in revenue, often under 50m

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What Mid-Tier Companies See as They Evaluate MA
as a Growth Tool

• Why Buy Now
• Lot of low-priced company inventory that could
  fit strategic need
• Faster way to build/expand customer relationships
• Gain new contract vehicles and brand in one or
  more additional market segments
• Build on existing markets
• Financing available at low rates
• Positions firm for greater value later
• Brings other critical assets into company
  management, technical, finance, clearances

• Why Hold Off
• Strategic sellers not available, due to lack of
  fit, desire by sellers not to be acquired by a
  smaller firm, unavailability of financing,
  overhead structure mismatch
• MA consolidation trend strong, gives rise to
  unrealistic seller pricing
• Integration challenge
• Possible bet-the-company issue
• Co-manage MA deal and ops
• Not experienced in MA
• If growing, mid-tier firm will have more
  financial and manpower
• Take advantage of good multiples to sell now

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Acquisitions by Federal Mid-Tier Buyers Increasing
of deals by mid-tier buyers
Jan-July 03 (49 deals)
Jan-July 04 (39 deals)
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How Mid-tier Acquirers Compete in MA with Tier 1
Primes

• High cultural appeal of the Mid-tier
• Entrepreneurship
• Ready access to the acquirer CEO, senior execs
• Acquirer CEO likely to have experienced many
  growth company situations
• Seller owners, employees retain sense of
  criticality in acquiring company
• Benefits can be just as strong as Tier 1
• Lenders educated on government MA, very
  comfortable with mid-tier
• Cost of debt capital still low
• Not as needed to finance internal growth, bankers
  eager to finance MA
• Mid-tier companies gain immediate cleared
  employees, market share, customer
  penetration/extension, key technical/managerial
  personnel
• As Tier 1 firms grow, less likely to find
  smaller, truly strategic MA fits, leaving more
  opportunity for the mid-tier
• Private equity gravitates to mid-tier firms as a
  platform in the federal sector
• Strong case for buy v. make

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Representative Mid-Tier Buyers
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• Creating and Defining
• Value/Deal Pricing

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MA Valuation Size/Specialty Matters
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The Value Table 10 Leading Factors in
Determining Defense Company Value

• Contract Alignment with the Mission de Jour
• 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 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

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

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Contact Data

• Paul Serotkin
• President
• Minuteman Ventures LLC
• 781 750 8065
• 703 894 1270
• 781 254 7267 mobile
• paulserotkin_at_minutemanventures.com
• www.minutemanventures.com