By Marc B. Marlin
“Mirror, mirror on the wall, who’s the most attractive Federal HIT firm of them all?”, said the strategic thinking corporate development officer. “The last deal you did, and the next one you will,” replied the magic mirror.”
If only it was that easy! On the heels of a historic stock market rally following the November election that has market valuations approaching all-time highs (at the time of this article), M&A appetite is front and center for government contractors of all sizes. Notwithstanding ongoing portfolio shaping, building scale, and “refocusing on the core,” industry foundations have settled and M&A desires are thriving. The quest for growth points towards opportunities in HIT, and M&A as the conduit to establish or augment competitive positioning. While M&A strategies remain firm-specific, the following M&A story lines should drive value and HIT deal activity in 2017.
Are SPARC and CIOSP3 Princes or Toads?
The fate of the SPARC (large and small) protests and CIOSP3 recertification and on-ramp may present the opportunity for new players and incumbents to drive revenue and target significant funding across the HIT landscape. During the SPARC protest, CMS has leveraged CIOSP3 set-asides but required recertification at the task order (“TO”) level; an untraditional procurement request. This approach has not only limited the playing field, to include boxing out many of the mid-size players but also discouraged enterprise value creation for the fortunate TO awardees. The ability for set-aside SPARC awardees to compete for full and open (“F&O”) TOs, or CMS to no longer require a TO recert presents a roadmap for SPARC awardees to drive enterprise value. For CIOSP3, decisions whether to on-ramp graduated small business incumbents or sustain the CIOSP3 “other” designation may have a similar effect on awardees given the flexible use of the vehicle across a broad base of federal customers. Hopefully, graduated CIOSP3 set-aside holders won’t be sent to the dungeon. Prime, F&O vehicles drive enterprise value and M&A attractiveness given the often scarcity of such vehicle positions and associated large, semi-protected market opportunity. As we saw from the multiple acquisitions under the SPARC predecessor ESD contract (ViPS, 2020, Maricom, Buccaneer, etc.), we see the potential for SPARC and CIOSP3 to encourage M&A activity in the coming year.
Keep the Plot Lines Simple: One Prince, One Princess, One Villain and They Live Happily Ever Afer
The simpler the corporate story, the clearer the M&A rationale. Too much diversity across a business simply challenges internal norms of many larger buyers (typically organized by customer vertical). Having a clear identity more succinctly fills or augments a suitor’s strategic gap. Customer depth and intimacy should continue to drive M&A value into 2017. A prime example was the recent acquisition of Edaptive Systems by ManTech. Edaptive, a CMS focused firm, augments ManTech’s CMS footprint affording it not only additional capabilities but also past performance and customer intimacy, leverageable on anticipated SPARC procurements and HHS opportunities more broadly. In 2017, the crystal ball suggests more focused M&A, as bets by many of the larger players seeking a fully built health platform (e.g., Maximus’ acquisition of Acentia in 2015) have been made.
Who Has the Magic Wand and What Can It Do?
Technology, technology, and more technology. While many Federal-health focused firms are customer deep and capability broad, there are select horizontal capabilities that remain of particular interest. Buyers cannot seem to get enough data analytics and next-generation IT (cloud, mobile, cyber, and digital). It’s all about the capabilities that drive mission. This was supremely evident in the Truven (IBM) and Aquilent (Booz Allen) deals in 2016. Firms with the next great “widgit” or ability to create magic with tools will remain in high demand. Firms with expertise in next generation IT and data analytics are perceived to hold the keys to the castle to unlock better care and improved outcomes at reduced costs.
Adventure Awaits – What Opportunities Will the New Administration Bring?
Firms will look to capitalize on opportunities driven by changes in the new administration’s priorities. Over the past decade, we saw firms accelerate growth curves on the wave of digitization and the Affordable Care Act (ACA). Implementation of ACA and ancillary programs funded billions of dollars in contractor opportunity. Proposed change to existing programs, irrespective of the magnitude of those changes, should create surge opportunities in areas such as application development. For example, in late 2014 Accenture was granted a contract for more than $500 million in support of healthcare.gov. Chaos breeds opportunity. The question is who will be the belles of the ball this time around.
There are Many Attractive Kingdoms
We anticipate firms will continue to broaden the customer footprint of their Kingdom. What was an M&A priority of CMS has quickly expanded to the broader HHS, NIH, VA, FDA, and CDC markets. While each submarket has their own dynamics and requires the aforementioned intimacy, there is a strategic connection amongst acquirers looking at a broader HIT strategy. For example, Cognosante, a traditional HHS and S&L focused firm, acquired Business Information Technology Solutions (BITS), a recently awarded T4NG unrestricted holder. The strategy here, like many other HIT deals, is expansion into a new customer. BITS not only brings Cognosante the vehicle but past performance and relationships. Building out the health customer set is nothing new, and a strategy anticipated to continue in full force for 2017.
M&A is very personal and unique to the specific strategy of the buyer. As the magic mirror replied, the most attractive and important is the last one done, and next one you’ll do. The rest of the story is yet to be told; perhaps the next chapter taking place outside the gates of the Magic Kingdom at HiMSS this winter.