SEPTEMBER DEFENSE TECHNOLOGY & GOVERNMENT SERVICES MARKET UPDATE

Transcription

1 SEPTEMBER DEFENSE TECHNOLOGY & GOVERNMENT SERVICES MARKET UPDATE Aronson Capital Partners, LLC 805 King Farm Boulevard, Suite 300 Rockville, Maryland Tel: (301) Fax: (301) Larry A. Davis Partner Tel: (301) Philip J. McMann Partner Tel: (301) John H. Saunders Partner Tel: (301) Frantz E. Casseus Associate Tel: (301) Timothy P. Schmitt Associate Tel: (301)

2 $ in Billions Healthcare IT Spending Analysis Rapidly Growing Market Opportunity The healthcare market is expected to be one of the single fastest transformations of any industry in U.S. history. With the passing of the Health Information Technology for Economic and Clinical Health ( HITECH ) Act and the Affordable Care Act, as well as a growing population of elderly patients, the government has committed to a new level of growth and spending in the healthcare market. The HITECH Act, which was enacted to improve healthcare delivery and the use of electronic medical records, allocates billions of dollars to certain hospitals and physicians who invest in information technology. The Affordable Care Act expands healthcare coverage and promotes advances in healthcare IT systems, drives investment in better medical technologies, enhances IT infrastructure and support, and encourages improved efficiencies and reporting tools. These newly enacted requirements significantly overhaul the healthcare system and continue to drive the growth of capabilities and services in both the commercial and federal space. Companies with capabilities in various areas of information technology can position themselves to enjoy high growth for the foreseeable future. Spending in federal healthcare IT is forecasted to grow at a 7.5% compound annual growth rate ( CAGR ) through As shown in the below exhibit, the greatest amount of growth is expected to take place at the Department of Health and Human Services ( HHS ) as allocations are made toward infrastructure modernization, payment systems, program integrity, and population health. $3.0 $2.5 $2.0 $ $1.6 $2.1 Federal Healthcare IT Forecast by Buyer $1.4 $1.8 $1.5 $2.6 $1.0 $0.5 $0.0 Veterans Affairs DoD HHS CAGR 5.6% CAGR 5.8% CAGR 11.5% Federal healthcare IT spending areas within these key agencies will include research, training, and further investment in public health; enhancement to electronic health records ( EHR ) application systems and other healthcare delivery services technologies; and modernizing the Center of Medicare and Medicaid Services ( CMS ) infrastructure and additional tools for program integrity and combating fraud, waste, and abuse. The M&A market has experienced a growing demand for contractors with capabilities in healthcare IT. Acquirers have shown an increased appetite for small, niche contractors with highly strategic capabilities and contract vehicles. In addition, acquirers have even shown a higher tolerance level for potential targets with a significant amount of 8(a) or other set-aside revenue in order to acquire niche capabilities and qualifications for better positioning on future, large-scale opportunities.

3 SELECTED M&A TRANSACTIONS KEYW Corp. to Acquire Poole & Associates, Inc. and Sensage, Inc. KEYW Corp. (NASDAQ: KEYW) announced on September 10, 2012 it had entered into a definitive agreement to acquire Poole & Associates, Inc. ( Poole ) for total consideration of $126 million, comprised of $116 million in cash and $10 million of KEYW stock. The deal closed on October 2 nd. The deal is expected to close within the next 60 days and is expected to be immediately accretive to earnings. Poole is a mission-centric provider of systems and software engineering services to the NSA and other U.S. Intelligence Community ( IC ) customers, and marks the largest NSA transaction since Raytheon s $490 million acquisition of Applied Signal Technology in January Poole was recently awarded a five year prime contract with a $150 million ceiling to provide systems engineering and program management support to the NSA. The purchase price of $126 million represents a 1.4x multiple of its 2013E revenue following its recent large award. Three days following the announcement of the Poole acquisition, KEYW announced that it has also entered into an agreement to acquire Sensage, Inc., a privately held provider of advanced Security Information and Event Management ( SIEM ) solutions in support of KEYW s line of cyber awareness products and services. KEYW will pay up to $18 million in cash and $16.5 million in KEYW stock, of which $10.5 million is contingent upon Sensage achieving certain revenue targets for the second half of Novetta Solutions Acquires International Biometric Group, LLC Novetta Solutions, LLC, a portfolio company of Arlington Capital Partners, announced on September 19, 2012 the acquisition of International Biometric Group, LLC ( IBG ). Novetta was formed in March 2012 through the merger of White Oak Technologies, Inc. and FGM, Inc., and added White Cliffs Consulting in August 2012, making IBG Arlington Capital s third bolt-on acquisition to its initial White Oak platform in IBG is a recognized leader in providing identity intelligence services and solutions to the Department of Defense, Federal-civilian agencies, law enforcement organizations, foreign governments, and commercial entities. Within the biometric identity domain, IBG has expertise in fingerprint, face and iris recognition, as well as counter-spoofing and noncooperative collection. In addition, IBG has developed a comprehensive suite of proprietary solutions including analysis platforms and technology databases. Michael Lustbader, a Partner with Arlington Capital, said in regards to the future of Novetta Solutions, We are committed to building Novetta into a world class national security company focused on providing transformational solutions and proprietary technology [IBG] is a strategic complement to Novetta s portfolio of big data analytics, SIGINT, information operations, and cyber security capabilities. Terms of the transaction were not disclosed. PricewaterhouseCoopers LLP to Acquire Ray Group International PricewaterhouseCoopers LLP ( PwC ) announced on September 13, 2012 it has signed a unit purchase agreement to acquire Ray Group International ( RGI ), a specialized healthcare IT, management, and communications support services provider to government clients, primarily the Department of Veterans Affairs. The acquisition builds upon PwC s growing technology consulting and implementation capabilities in the areas of IT strategy, IT security, and enterprise architecture. The transaction is expected to close in days, and terms of the deal were not disclosed. INDUSTRY UPDATES BAE Confirms Talks with EADS Regarding Potential $42 Billion Combination On September 12, 2012, BAE Systems plc (LSE: BA) released a statement confirming they are in discussions with EADS N.V. (ENXTPA: EAD) regarding a potential combination of the businesses. The discussions envisage a combination in which both companies operate as one group by means of equalization and continue under one board and management structure. The deal would create a global aerospace and defense giant with combined revenues of more than $90.3 billion and 220,000 employees. A joint article written by BAE s CEO Ian King and EADS CEO Tom Enders claims it is a combination borne out of opportunity, not necessity. EADS is currently working on arrangements that would replace current shareholder agreements that grant Daimler, Lagardere, and the French state joint control of the business in order to continue pursuing the potential combination. French media company Lagardere, which owns a 7.5% stake in EADS, has been outspoken in its opposition of the potential combination, stating, Lagardere considers that the conditions for joining EADS and BAE together are unsatisfactory at this stage. Lockheed Martin Divests Wholly Owned Subsidiary Savi Technology to LaSalle Capital Lockheed Martin Corp. (NYSE: LMT) has completed its divestiture of its wholly owned subsidiary Savi Technology after first announcing its intent to divest the business in November Lockheed first acquired Savi in June At the time, Lockheed chairman and CEO Bob Stevens stated, The acquisition of [Savi] is consistent with our strategy of making investments that significantly enhance the capabilities we can offer our customers, specifically referring to Savi s proprietary RFID and logistics solutions serving the Department of Defense, international defense agencies, and commercial enterprises. Lockheed cited Savi s need to expand in the commercial market, away from Lockheed s core market areas. LaSalle Capital acquired the business from Lockheed for an undisclosed sum. Charles Meyer, President of LaSalle Capital, stated, Savi Technology has been at the forefront of innovation in logistics and supply chain for 23 years We look forward to working with management in accelerating growth and expanding Savi s opportunities and offerings.

4 SAIC Spinoff Update The board of directors at SAIC Inc. (NYSE: SAI) gave management approval to formulate a plan to split SAIC into two independent, publicly traded companies. Based on current plans, the two separate businesses would be: A technical service business This business will focus on government technical services and enterprise IT businesses, and have a leaner and more efficient cost structure. Pro forma revenue for the fiscal year ending January 31, 2013 for the future technical services business is estimated at $4 billion. A solutions-focused business This business will focus on delivering science and technology solutions in three high-growth markets that reflect high priority, long-term global needs national security, engineering and health. Pro forma revenue for the fiscal year ending January 31, 2013 for the future solutions-focused business is estimated at $7 billion Strategy Overview Target Markets Points of Differentiation Thesis of Value Creation Solutions Focus: National Security, Engineering, and Health National defense systems, engineering and health technology provider leveraging systems engineering integration, sensors, analytics, and large scale data management capabilities in high growth markets with mission, complexity, and large scale information characteristics Mission Capability Integrator ISR platform development, (airborne, maritime, space, and ground) ISR processing, exploitation, and dissemination Cybersecurity Engineering Energy, environment, and infrastructure Water and natural resources Electronic health records analytics and support Government equipment modernization and sustainment Security screening products Ability to leverage big data and data analytics to raise the level of health and engineering IT Expand M&A opportunities/revenue growth initiatives Unlock growth by removing restrictions Leverage focused synergy areas (Cyber/Data security, data analytics, and actionable exploitation) Open new revenue and M&A opportunities Increase prominence to investors of fast growing Health and Engineering businesses Strategy Overview Target Markets Points of Differentiation Thesis of Value Creation Technical Services Focus: Government Technical Services and Enterprise IT Government technical services provider leveraging significant value from long-standing customer relationships and mission expertise with a focus on differentiated and repeatable solutions and processes combined with delivery at a competitive price Government enterprise IT services Testing and service life extension Logistics and supply chain management Systems Engineering and Technical Assistance ( SETA ) Engineering breadth, supply chain, technical expertise Customer affinity and mission expertise Low cost leadership Improve management focus on Government services market Drive a lower cost base tied directly to business needs Expand addressable market and revenue growth through the removal of restrictions Source: SAIC Investor Presentation: Unleashing Our Full Potential, August 30, 2012.

5 Enterprise Value/LTM EBITDA Indexed Performance GOVERNMENT SERVICES INDU STRY PERFORMANCE LTM 9/30/2012 Returns S&P: 27.3% Mid-Tier: (4.1%) Tier-1: 16.7% Oct-11 Feb-12 Jun-12 Sep x 7.0x 9/30/2012 EV/LTM EBITDA Mid-Tier: 5.4x Tier-1: 6.0x 6.5x 6.0x 5.5x 5.0x 4.5x 4.0x Oct-11 Feb-12 Jun-12 Sep-12 Source: CapIQ Mid-Tier Index: BAH, CACI, CUB, DRCO, ICFI, KEYW, MANT, MRCY, NCIT, SAI Tier-1 Index: BA, GD, HRS, LLL, LMT, NOC, RTN

6 PUBLIC COMPANY COMPARABLES (USD in Millions, excluding share prices) EV as a Multiple of Price Annual Annual % of Equity Market Enterprise LTM LTM LTM NTM EBITDA Margin Revenue Growth Company 9/30/2012 High Low High Value Value Revenue EBITDA Revenue EBITDA Revenue EBITDA CY12E CY13E CY12E CY13E Mid-Tier Federal Service Providers SAIC, Inc. 1 $12.04 $14.20 $ % $4,116 $4,660 $10,933 $ x 11.5x 0.4x 5.1x 8.3% 8.5% 5.2% (2.5%) Exelis, Inc % 1,932 2,672 5, x 3.7x 0.5x 4.0x 12.8% 12.6% (5.8%) (5.1%) Booz Allen Hamilton % 1,835 2,454 5, x 5.0x 0.4x 4.8x 8.9% 9.0% (0.3%) (1.7%) CACI International Inc % 1,174 1,702 3, x 4.8x 0.4x 4.9x 9.2% 9.1% (0.2%) 1.8% ManTech International Corporation % , x 3.4x 0.4x 4.6x 9.0% 8.4% (7.2%) (2.3%) ICF International Inc % x 6.2x 0.6x 5.6x 9.9% 10.1% 11.9% 4.0% The KEYW Holding Corporation % x 18.4x 1.5x 13.7x 12.8% 13.3% 29.8% 49.1% VSE Corp % x 4.7x 0.6x 4.6x 12.5% 12.2% (10.1%) 3.8% Engility Holdings, Inc % , x 1.7x 0.2x 2.3x 8.6% 8.7% NA (12.2%) Dynamics Research Corporation % x 3.7x 0.6x 6.1x 9.6% 9.6% (0.3%) (3.1%) NCI, Inc % x 5.3x 0.4x 9.0x 4.7% 4.5% (35.6%) (4.7%) Mean 0.6x 6.2x 0.5x 5.9x 9.7% 9.6% (1.3% ) 2.5% Median 0.5x 4.8x 0.4x 4.9x 9.2% 9.1% (0.3% ) (2.3% ) Tier 1 Prime Contractors The Boeing Company $69.60 $77.83 $ % $52,321 $53,359 $76,670 $7, x 6.8x 0.6x 6.8x 9.5% 10.0% 17.5% 8.1% Lockheed Martin Corporation % 30,107 32,798 47,544 5, x 6.1x 0.7x 6.9x 11.0% 11.2% (1.8%) (1.2%) General Dynamics Corp % 23,326 24,719 32,501 4, x 5.5x 0.8x 5.5x 13.7% 13.8% (1.1%) 0.1% Raytheon Co % 18,978 20,837 24,534 3, x 6.0x 0.9x 6.6x 13.3% 13.5% (1.2%) (1.3%) Northrop Grumman Corporation % 16,422 17,206 25,590 3, x 4.7x 0.7x 5.4x 13.8% 13.3% (4.7%) (2.3%) L-3 Communications Holdings Inc % 6,924 10,687 14,948 1, x 5.8x 0.8x 6.8x 12.2% 12.3% (14.0%) (2.3%) Mean 0.7x 5.8x 0.8x 6.3x 12.2% 12.4% (0.9% ) 0.2% Median 0.7x 5.9x 0.7x 6.7x 12.7% 12.8% (1.5% ) (1.3% ) Defense System / Electronics Firms Rockwell Collins Inc. $53.64 $61.46 $ % $7,625 $8,344 $4,756 $1, x 8.0x 1.7x 7.6x 23.3% 23.0% 0.2% (0.5%) Harris Corporation % 5,770 7,460 5,451 1, x 6.4x 1.4x 6.1x 22.1% 21.2% (7.6%) (1.4%) Teledyne Technologies Inc % 2,334 2,694 1, x 9.1x 1.2x 8.1x 15.0% 15.4% 7.8% 8.2% Cubic Corporation % 1,338 1,111 1, x 7.6x 0.8x 8.0x 10.6% 10.2% 1.2% 3.0% Kratos Defense & Security Solutions % x 8.4x 0.8x 6.3x 12.2% 13.3% 33.0% 8.0% Mercury Computer Systems, Inc % x 5.5x 0.8x 5.3x 14.9% 18.2% 7.9% 24.6% Mean 1.2x 7.5x 1.1x 6.9x 16.3% 16.9% 7.1% 7.0% Median 1.2x 7.8x 1.0x 6.9x 14.9% 16.8% 4.5% 5.5% Foreign Contractors EADS $31.68 $40.70 $ % $26,034 $22,195 $66,078 $4, x 4.8x 0.3x 3.7x 8.0% 9.3% 9.4% 4.1% BAE Systems plc % 17,033 18,385 26,550 3, x 5.4x 0.6x 4.9x 12.1% 11.9% 12.0% 1.7% Finmeccanica SpA % 2,744 10,350 21,562 (934) 0.5x N/A 0.5x 4.7x 9.5% 10.2% (2.5%) 2.0% Thales SA % 6,836 6,661 17,079 1, x 4.6x 0.4x 3.8x 9.6% 10.3% 4.7% 0.4% Serco Group plc % 4,584 5,619 7, x 9.8x 0.7x 8.7x 7.8% 7.9% 10.0% 5.3% Cobham plc % 3,855 4,720 2, x 7.4x 1.6x 7.3x 22.8% 23.0% (1.7%) 3.2% QinetiQ Group Plc % 1,979 2,190 2, x 6.4x 1.0x 7.2x 13.1% 12.4% (2.9%) 0.2% Ultra Electronics Holdings plc % 1,714 1,824 1, x 8.8x 1.4x 8.1x 17.1% 17.4% 13.8% 2.9% Mean 0.8x 6.7x 0.8x 6.1x 12.5% 12.8% 5.3% 2.5% Median 0.7x 6.4x 0.6x 6.1x 10.9% 11.1% 7.0% 2.5% Commercial IT Firms IBM $ $ $ % $237,069 $258,366 $106,099 $26, x 9.6x 2.4x 8.9x 25.9% 27.1% (1.6%) 2.6% Accenture plc % 48,251 42,087 27,862 4, x 9.4x 1.4x 8.9x 16.1% 16.2% 5.8% 6.7% Xerox Corp % 9,517 18,348 22,591 3, x 5.6x 0.8x 5.4x 14.3% 14.6% (0.4%) 1.9% Computer Sciences Corporation % 5,005 6,768 15,801 1, x 4.9x 0.4x 3.7x 10.1% 11.7% (1.1%) (0.4%) Unisys Corporation % , x 1.8x 0.2x 1.8x 12.9% 12.9% (2.4%) 0.3% Navigant Consulting Inc % x 7.1x 0.9x 6.5x 12.8% 13.6% 18.8% 5.0% Black Box Corp % , x 6.6x 0.6x 6.9x 8.2% 9.1% (6.8%) 1.1% Kforce Inc % , x 15.1x 0.4x 6.5x 5.8% 6.6% (2.0%) 7.8% Source: Capital IQ Mean 0.9x 7.5x 0.9x 6.1x 13.3% 13.9% 1.3% 3.1% EV: Enterprise Value Median 0.7x 6.9x 0.7x 6.5x 12.9% 13.2% (1.3% ) 2.2% LTM: Trailing Twelve Months NTM: Next Twelve Months ¹ LTM EBITDA for SAIC includes a $300 million nonrecurring loss due to the CityTime settlement. 2 LTM EBITDA for KEYW does not include the historical results of the recent material acquisitions of Poole & Associates and Sensage.

7 RECENT INDUSTRY M&A TRANSACTIONS Industry M&A Transactions Date Buyer Target Target Business Description EV($M) EV/LTM Revenue Multiple EV/LTM EBITDA Multiple Pending KEYW Corp. Sensage, Inc. Provider of advanced Security Information and Event Management $34.5 N/A N/A (SIEM) and event data warehousing solutions to enterprise and government customers Pending Thoma Bravo, LLC Deltek, Inc. Provider of enterprise software and information solutions for 1, x 14.6 x professional services firms and government contractors Pending DigitalGlobe, Inc. GeoEye, Inc. Provider of earth imagery and geospatial analysis x 5.2 x Oct-12 KEYW Corp. Poole & Associates, Inc. Provider of mission-centric systems and software engineering services x N/A to the U.S. intelligence community Sep-12 Northrop Grumman M5 Network Security Provider of cybersecurity and secure mobile communications products and services to Australian military and intelligence clients Sep-12 LaSalle Capital Group Savi Technology Divested from Lockheed Martin Corp, Savi Technology provides logistics and supply chain solutions that streamline operations and improve enterprise decision making Sep-12 Novetta Solutions International Biometric Provider of identity intelligence services and solutions to DoD, Fed-civ Group, LLC agencies, law enforcement, and commercial clients Sep-12 Pricewaterhouse Ray Group International Provider of healthcare IT, management, and communications solutions Coopers to VA Sep-12 General Dynamics Open Kernal Labs Inc. Provider of virtualization software for securing wireless communications, applications and content for mobile devices and automotive in-vehicle infotainment systems Aug-12 DCS Corporation Infoscitex Corporation Services include modeling, simulation and analysis, human biodynamics research, advanced manned and unmanned air vehicle systems, material science solutions, software development, andcyberdomain techniques Aug-12 General Dynamics Fidelis Security Systems, Inc. Specializes in cyber security tools that provide real-time network visibility, analysis and control Aug-12 Novetta Solutions White Cliffs Consulting Provider of discovery analysis, engineering advisory, high-end consulting, and technical services Aug-12 Sonus Networks, Inc. Network Equipment Provider of high performance networking equipment optimized for realtime Technologies, Inc. communications to enterprise and government customers Aug-12 Ixia BreakingPoint Systems, Inc. Provider of network security testing and optimization solutions Aug-12 CGI Group Inc. Logica plc Business and technology services company providing business consulting, systems integration, and outsourcing services worldwide 3, x 7.7 x Aug-12 Digital Management, Inc. Mission Critical Wireless, LLC Aug-12 SAIC, Inc. maxit Healthcare Holdings, Inc. Aug-12 Aug-12 Layered Technologies, Inc. (portfolio co. of Accel-KKR) Mercury Computer Systems New World Apps Micronetics, Inc. Provider of mobile device management and mobile infrastructure management services Provider of various services and solutions, including IT strategy and planning, electronic health record (EHR) implementation and optimization, and management consulting Specializes in secure private cloud and secure community cloud solutions for federal, state and local governments Manufacturer of microwave and radio frequency components and integrated subassemblies used in a variety of defense, aerospace and commercial applications Jul-12 DCS Corporation OptiMetrics, Inc. Key service offerings in CBRNe defense, electro-optical evaluation and development, training and simulation, and combat vehicle survivability for the Department of Defense Jul-12 Jul-12 The Resolute Fund II, L.P. (affiliate of The Jordan Company) Environmental Systems Research Institute, Inc N/A N/A x 10.6 x VT Services, Inc. Provider of engineering and logistics services in support of DoD mission critical systems, logistics and operational readiness, and platform sustainment initiatives x N/A GeoIQ, Inc. Provider of real time location analysis software Jul-12 DC Capital Partners, LLC Catapult Technology, Ltd. Provider of information technology and management consulting services to the federal government Jul-12 Exelis, Inc. Space Computer Corporation Provider of real time signal processing systems, software, and algorithms for the exploitation of hyperspectral sensor data Jul-12 CACI Delta Solutions Technologies Provider of federal financial management and technology solutions customized to the U.S. government Jul-12 Kratos Defense & Composite Engineering, Inc. Manufacturer and developer of unmanned aerial target systems and Security Solutions, Inc. compostie structures for use in National Security programs Jun-12 Serco Group Vertex Public Sector Limited Provider of dedicated business process outsourcing services to both local and central government Jun-12 Veritas Capital Thomson Reuters' Provider of data, analytics and performance benchmarking solutions Healthcare Business and services to hospitals, health systems, employers, health plans, government agencies, and healthcare professionals Source: Company Press Releases; Capital IQ; Infobase EV: Enterprise Value LTM: Last Twelve Months x N/A x 9.7 x 86.0 N/A N/A 1,250.0 N/A N/A

8 REPRESENTATIVE ACP TRANSACTIONS on their sale to on its acquisition of xx WHO IS ARONSON CAPITAL PARTNERS? Aronson Capital Partners is a leading financial advisor to government services and technology firms. We exercise our special domain expertise in the Defense, Intelligence, and Federal Civilian markets to achieve exceptional results for our clients. In addition to completing more than 100 transactions in the federal sector, our principals have decades of executive level, hands-on experience in the industry a key differentiator that leads to success. M ERGERS & ACQUI SI T I ONS: Sell-Side M&A Buy-Side M&A Private Equity Platform Acquisitions Management & Leveraged Buyouts Divestitures Asset Sales ESOP CORPORATE FI NANCE: Recapitalizations & Restructurings Common & Preferred Equity Senior Debt Subordinated Debt Convertible Debt Private Equity Investments Minority Equity Investments F I NANCI AL ADVI SORY: Internal Capital Transaction Advisory Independent Corporate Valuations Fairness Opinions Strategic Alternatives Assessments