Companies serving the electronic intelligence market, or that excel in niche areas of intelligence gathering, will continue to be in high demand under the new administration, industry sources said. The industry is highly fragmented, offering significant opportunity for consolidation both within the industry and by the large prime contractors.
The sources identified several companies as likely targets: Applied Signal Technology (NASDAQ: APSG), Sierra Nevada Corporation, Sensis, QTSI, and Integrity Applications Inc. All five have significant strength on the device or software side of electronic intelligence. Previous reports on this news service have tagged Applied Signal and Sierra Nevada as targets.
An industry banker said that Sensis’ preferred exit strategy has been to seek an IPO but argued that most public defense electronics companies are trading at below 9X EBITDA. A sale might provide Sensis with a multiple offer of 10X EBITDA or more, the standard M&A rate in the industry, the banker added. Applied Signal could also sell for that multiple, said the banker, as could Sierra Nevada, but the latter company has stated that it seeks to grow its annual revenue to USD 1bn before considering strategic options.
An industry analyst said that Sensis might be a good target for Lockheed-Martin and Northrop-Grumman. The company, headquartered in Syracuse, New York, develops commercial and military radar, and generates revenues between USD 100m and USD 150m.
A second banker agreed that device-oriented companies like Applied Signal or Sierra Nevada would be likely to see multiples of 9x or 10x EBITDA. Human services for SIGINT (Signals Intelligence, intelligence concerned with the interception and analysis of electronic signals), such as information assurance, are more likely to see 2x revenues, due to their lower infrastructure costs.
A source at Chantilly, Virginia-based engineering services company Integrity Applications Inc (IAI) said the company receives quite a bit of acquisition interest from larger companies in the sector. The company has over USD 70m in revenues and more than 300 employees, the source said. He noted that the company fields calls from hundreds of bankers trying to make a deal happen. However, IAI is not interested in selling and wants to continue its reputation for quality, he said.
QTSI, based in Cocoa Beach, Florida, specializes in MASINT, measurement and sensors intelligence. President Mark Tinker said the company receives interest, and that it would make sense as an acquisition for one of the prime contractors. However, the company "is happy on its current path." According to Fedspending.org, QTSI had federal contracts worth USD 14.5m in 2007.
Companies serving the intelligence market have been very attractive targets for some time due, in part, to the very high barriers to entry employed by the intelligence community, said one industry CEO. "That work usually requires TS/SCI [Top Secret/Sensitive Compartmented Information] clearance, and a full poly[graph]," the CEO said. "When you combine those clearance requirements with a technical skill," said an industry banker, "you are looking at a very rare commodity."
In fact, just last month, Boeing (NYSE: BA) bought DRT. Device companies like DRT, which makes receivers and transceivers for communications monitoring, are in short supply. "An attractive device company cannot be speculative. The business and technology have to be proven, with infrastructure and significant revenues, probably looking at revenues between USD 25m – 100m plus," an industry banker said.
At the Defense Intelligence Agency's Industry Day conference, LTG Michael Maples, a director at DIA, said that the last Quadrennial Defense Review had called for the Pentagon to shift its focus towards "information, knowledge, and timely, actionable intelligence." The resulting shift, LTG Maples said, could claim some credit for the current war-fighting success around the world.
A second industry banker said that cutting intelligence and homeland security-related activities would be "political suicide" for either party, particularly if a terrorist attack happened after such cuts. Michael Lewis, an analyst at BB&T Capital Markets, said that there is still significant opportunity for growth, both organic and inorganic, in a highly fragmented market. "I don't want to put a number on it, but there are a lot of small, private companies with high-end technology. They have huge growth potential on their own, but eventually, they'll hit a ceiling on their growth and look to combine."
by Charles Rice, Kevin Nafziger, and Richard Tekneci
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