Large cap players are increasingly using a public "put it out there" approach to initiate strategic alternative discussions. They are doing so without the typical shroud of confidentiality and in some cases even before preparing marketing materials.

For example, SRA International was rumored to be exploring an IPO in early June, but later in the month sources confirmed SRA IPO or sale. More recently, Lockheed Martin made a similar significant announcement regarding considerations for parts of its Information Systems & Global Solutions business and L-3 regarding its NSS unit.

Traditionally, government services firms have been very focused on confidentiality during active or potential M&A activities given the intimate personal connections between individual employees and customers, as well as the fact that assets walk out the door every night. M&A discussion has been perceived to expose the seller to employee poaching, and / or competitor whispers to customers around program continuity or delivery risk on new awards. As a result, deals are rarely announced prior to signing a definitive agreement or closing. Notably, a more forward, public announcement tactic has been long used in the commercial M&A markets to garner a wide audience of potential suitors.

Potentially in self-recognition of the scarcity value of larger (~$500M+ deals) government system firms, select larger players are embracing the tradeoff of confidentiality risk and public outreach, as evidenced by BAE Systems sale of its services group, Vencore, PAE, and Novetta, amongst others. In each case, these companies also provided explicit or implicit valuation guidance. These announcement details set expectations from the onset to accelerate buyers' self-selection to those most serious.

So is this the burgeoning of a new norm for companies of all sizes?  We don't think so. The market will indeed look to these examples to see if the gains of a heightened competitive environment outweigh the public nature of the market approach. However, the nuance that may keep this strategy pinned to larger companies is culture. Many of the larger firms are already public or private equity ("PE") owned, so the market, employees, customers, and rest of the contracting eco-systems expect transactions to happen.

PE platforms operate with the processes, culture, and go-to-market strategy of a public company, as well as the expectation of a transaction, often within a five-year window. As a result, the fear of employee flight, emotional attachment / responsibility by owners or employees, and family-like atmosphere change. Additionally, the loss of small business or other preference program benefits to the customer or prime remain destabilizing factors for the smaller company sale, but are absent in the larger deals.

For smaller, entrepreneurial firms, confidentiality is a key mitigator of these considerations and cultural concerns. The new sell-side process may very well become contagious amongst the larger deals and especially PE platforms, but only time will tell whether it will influence the lower middle market.

Marc Marlin is managing director at the technology solutions and aerospace/defense investment bank KippsDeSanto & Co.

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