2005 sees busy, rich M/A activity in government security services sector

Corporation, Herndon, Virginia-based McDonald Bradley, Fairfax, Virginia-based ICF Consulting, and Oxnrad, alifornia-based ITS Corporation. Smaller public companies also were active, among them including Fairfax, Virginia-based Analex, San Diego, California-based SYS Technologies, and Sunnyvale, California-based Applied Signal Technology.

In addition, private equity firms remained active investors, with thirteen federal services acquisitions completed by such groups. We note two additional aspects of 2005:

A new creature emerged last year — the special purpose acquisition corporations (SPACs), that is, public entities which raise money to acquire companies in a specific industry. New York-based SPAC Federal Services Acquisition Corporation (FSAC), for example, raised $126 million in an IPO to buy federal services companies (see more below).

Large U.K. firms remained active buyers of U.S.-based defense services firms, the most active being BAE Systems, QinetiQ, and SERCO.

“Acquisitions continue to deplete the ranks of mid-tier firms and public companies — two types of firms that actively acquire — faster than they are being replenished,” said Serotkin. At the same time, the large number of smaller companies, the push by large platform firms into services, the growing activity of financial buyers, the government’s use of outsourcing, and generally positive economic conditions all favor continued sector consolidation.

We do not know how happy they will be about it, but private equity groups and companies making deals in the homeland security and government contracting market are facing new competition. During the past two years we have began to see the emergence of the special purpose acquisition vehicles, or SPACs, as alternative financing vehicles in the public sector. SPACs are companies which have no operations but which go public and then use the proceeds of an initial public offering to acquire a company. Large institutional investors, such as hedge funds, usually buy shares of SPACs.

In the public sector these