After a tumultuous 2021 in the government M&A market, we entered 2022 with a number of questions about what to expect in the coming year.

As we reflect on the first half of 2022, some of these questions have been answered, while other key themes are emerging and impacting deal activity.

The government M&A market was incredibly active in 2021. Relatively cheap and readily available debt financing, strong balance sheets, anticipation of tax reform on corporate and capital gains rates, and renewed appetite for M&A after an initial and thankfully short-lived lull of the pandemic in 2020. M&A activity led to record activity of more than 180 announced transactions.

In the second half of 2021, M&A activity was particularly strong with 104 transactions announced. Although expectations for 2022 were tempered somewhat, the overall market sentiment remained extremely positive, supported by significant acquisitions and expectations of continued, moderate economic growth and fiscal support.

Then came the first half of 2022, a tale of two interrelated and in some ways conflicting deal-making stories. The collective hangover in deal announcements given the feverish second half of 2021 has been met with volatile public markets, a new wave of COVID, rising interest rates, a conflict in Ukraine that has brought back conventional warfare and near-equal national state threats from above, and 25 % YoY decline in deal announcements comparing H1 2021 to H1 2022.

However, below the surface, statistics and news, industry fundamentals, M&A appetite/activity and deal conditions remain strong.

While well off the pace of 2021, deal activity is still trending above historical norms

By June 30, 2022, the annual transaction volume of ~120 transactions will only be surpassed in 2020 and 2021 – despite a slower start to the year. Although public markets have experienced significant volatility, balance sheets remain strong and budgets remain robust, providing acquirers with plenty of support for their M&A appetites.

Thus, deal announcements are expected to accelerate in the second half of 2022, outpacing the total number of announcements for the entire year at the current pace.

Geopolitical instability remains front and center

Russia’s invasion of Ukraine sparked a brief rally in the performance of defense stocks and state-owned public companies in early 2022, although that has moderated in recent weeks despite the ongoing conflict.

Given the way defense budgets act as a leading indicator of M&A, it will be important to track how the increased emphasis on the international threat landscape will increase the focus on our national security posture and budget support.

Macro influences are positive for the background of transactions.

Private equity continues to play an incredibly active role with increasing influence on dealmaking

Private equity interest in the government services market remains very high – this can be seen in deal volume as well as fundraising efforts.

Nearly 50% of government services transactions in the first half of 2022 involved private equity (new platforms and portfolio changes), while fundraising activity for government services and space/defense-focused funds further demonstrated bullish sentiment in these sectors.

From the recent fundraising front:

  • Arlington Capital Partners files SEC statement of intent to raise $3.5 billion Fund VI (April 2022)
  • Blue Delta Capital Partners closed its Fund III at $215 million in December 2021 (oversubscribed)
  • Enlightenment Capital closed its Fund IV at $540 million in June 2022 (oversubscribed)
  • Raised Veritas Capital closed its $1.8 billion Vantage Fund in May 2021 (oversubscribed).

Private equity groups are also increasingly a “net buyer” in the public services arena, with platform acquisitions and insertions far outstripping exits. Some recent, aggressive stocking strategies include:

  • Arlington-backed Blue Halo has made more than 10 acquisitions since 2019
  • Arlington-backed Octo has made four acquisitions since 2019, punctuated by the significant recent acquisition of B3 Group, Inc.
  • The amalgamation of five Carlyle businesses from 2021 as part of the Two Six Technologies platform
  • Enlightenment Capital Backed Three Aeyon Acquisitions Between September 2021 – February 2022
  • Godspeed Capital’s newly formed SilverEdge Government Solutions business consists of three acquisitions made between December 2021 – February 2022.

Regulators are taking a more aggressive stance on consolidation within the federal markets

Several recent deals highlight this recent trend and highlight this as an additional consideration for both mid-sized and large companies. Lockheed Martin’s planned $4 billion+ acquisition of Aerojet Rocketdyne was ultimately shelved in February 2022 after the Federal Trade Commission filed a lawsuit to block the deal, while L3Harris recently abandoned talks to acquire NSO Group’s surveillance technology after concerns of the White House.

In June 2022, the Justice Department filed a civil antitrust lawsuit to block Booz Allen Hamilton’s proposed acquisition of EverWatch on the grounds that it would limit competition at the National Security Agency.

Although generally viewed as a more common product-side concern, the Booz Allen Hamilton/EverWatch case highlights the need to carefully consider customer/technology overlap and concentration within service businesses as well.

An obvious consideration, but not expected to be a deal breaker.

The Plight of the Perceived Undersized Public Company – Too Big to Be Small and Too Small to Be Big

After rumors of a potential sale of ManTech began to intensify in early 2022, Carlyle announced its intention to acquire the company in May. This represents another recent example of financial sponsor involvement in taking a public company private (eg Veritas-backed Peraton acquiring Perspecta, Lindsey Goldberg-backed Amentum acquiring PAE).

In addition, Vectrus recently completed its merger with Vertex, creating the publicly listed V2X and maintaining a trend of significant average revenue growth among public utility companies, which has been fueled by other large public acquisitions over the past few years (e.g. Jacobs / KeyW, SAIC / Engility).

The trend of consolidation, scale and financial horsepower for investment and M&A continues to motivate megadeals.

The basics still matter

Despite all the diverse factors influencing the government services M&A markets, some key fundamentals remain paramount. Companies positioned in high-growth areas, built for scale and with mature growth drivers will continue to attract significant interest from potential acquirers.

Combining these attributes with access to existing unrestricted supplies, Indefinite Quantity (“IDIQ”) contracts, General Purchase Agreements (“BPA”), Other Transaction Agreements (“OTA”) and task order based remuneration is a strong differentiator for vendors, especially when considering current procurement challenges affecting government agencies and competitive pressures in a crowded marketplace.

The first half of 2022 highlighted some of the more qualitative versus quantitative indicators of deals. However, these trends are underpinning a mature dealmaking environment and a brewing momentum for increased activity levels in the second half of 2022 that rivals the momentum we saw in 2021.

About the author: Brian Tunney is a director at investment bank KippsDeSanto & Co. and has nearly 15 years of M&A experience. He is a graduate of the University of Virginia. He can be reached at

Investment banking products and services are offered through KippsDeSanto & Co., a non-bank subsidiary of Capital One, NA, a wholly owned subsidiary of Capital One Financial Corporation and member FINRA and SIPC. The Products and Services are not FDIC insured, not bank guaranteed, may lose value, are not a deposit, and are not insured by any federal government agency.

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