ATS Acquisition a Boost For Blank-Check Buying
Monday, May 8, 2006
Advanced Technology Systems Inc . of McLean had many suitors when founder Del Lewis decided to sell the government technology contractor.
Unlike scores of small federal contractors that have been snapped up by bigger companies and private investors over the past few years, though, ATS made its deal with a public company that was started just last year and has nothing to its name but a bundle of money from trusting investors.
Federal Services Acquisition Corp . , a New York company led by federal contracting veteran Edward H. Bersoff , last month agreed to buy ATS for up to $124 million, a rich price for a firm with only $107 million in revenue.
Federal Services is a "blank check" company that went public last year. Blank-check companies have no operations and only one purpose: to buy companies with real business. Federal Services is one of three such companies looking to buy government contractors in the information technology or homeland security sectors locally, and it was the first to make a deal.
Like Bersoff at Federal Services, the other two are headed by names well recognized locally, such as former representative C. Thomas McMillen (D-Md.) and former White House counterterrorism adviser Richard A. Clarke .
"Somebody has to be first, but ATS is definitely not last," said Bersoff, who founded contractor BTG Inc. in 1982, grew it to more than 1,800 employees and sold it for $142 million in 2001. "In our exploits, we have identified many, many others that are candidates for further acquisition. It's a target-rich environment. There are plenty of people who are willing and eager and able to sell."
The blank-check firms join a flock of hungry buyers for the region's fragmented community of companies, many of them family-owned, that sell specialized services to defense, intelligence and civilian agencies. Last year, 47 local federal technology contractors were sold, and investment bankers predict that number will increase this year as buyers seek to cash in on growing federal and local budgets for technology and security expertise.
Among the buyers are corporate buyout funds looking to take slow-growing businesses, use them as a platform for more acquisitions, then sell the bigger company a few years later. Bersoff's Federal Services is using the same tactic, although it is a public company.
With so many others willing and eager to buy, valuations of target companies are being driven up to levels never before seen. Bersoff said he bought ATS for about 9.7 times operating earnings. That's about double the going rate for such companies before 2000.
"ATS definitely went for a premium," said Larry A. Davis , managing partner of Rockville's Aronson Capital Partners , which represents sellers of small companies in the government, defense and intelligence space. "It's gotten to the point where I don't see how valuations will expand much further. I think we're at a peak."
But Davis, who wasn't involved in the ATS deal, said it's not a bubble. "These are real companies with real business and real earnings, and they're in an environment where the demand for their services will grow for many, many years."
The ATS deal will create a few more millionaires in the local government sector. The company was founded in 1978 by Lewis, who still owns most of the stock and is the company's chairman and chief executive. About three-quarters of its technology consulting and integration business is with civilian agencies, the rest in defense and intelligence.
After the deal is completed later this year, Lewis plans to retire. Bersoff will become chief executive, and Federal Services will move from New York to ATS's headquarters in McLean, effectively bringing the area a new public company.
The ATS purchase demonstrated that blank-check acquirers are an option for companies that are willing to sell but don't necessarily want to deal with a private equity partnership or be subsumed by a larger contractor.
"One of the attractions in this case was our structure," said Peter M. Schulte , one of Bersoff's management partners in Federal Services and a principal at New York private equity fund CM Equity Partners .
A blank-check buyer provides individual owners -- and employees -- a way to cash out while keeping a bit of skin in the game in the form of publicly traded stock.
Lewis is taking mostly cash for ATS. The price was $84 million in cash upfront, $1 million in stock, plus $39 million in cash over two years provided that ATS hits certain performance targets. Lewis did not return phone calls last week.
Bersoff made his deal less than six months after going public, well within the 18-month time limit for a blank-check company to make a purchase under Securities and Exchange Commission rules.
McMillen's company, Fortress America Acquisition Corp ., has a year-end deadline to make a deal, though McMillen said he'd like to have one in hand by July. If he doesn't get a deal done, McMillen will have to give back the more than $42 million he raised in Fortress America's IPO last summer.
"We're working on deals, and we're very optimistic," McMillen said.
Clarke's Good Harbor Partners Acquisition Corp . recently raised more than $50 million to acquire companies in the defense and homeland security sector, so its dealmaking clock has just started ticking.
Clarke, who is chairman of the company, said he's not worried about being priced out of deals.
"There's a lot of capital, but a lot of it doesn't meet the needs of the companies we want to buy," he said. "There's venture, capital or private, but that comes with a lot of strings. There's capital out there for very large companies. But for a company that is looking for an IPO, has good management, and wants to divest itself of the VC or private equity firms on its board, there's not a lot of choice. I would say that with those who understand [blank-check] companies, we've gotten a very good reception so far."
Terence O'Hara can be e-mailed email@example.com.