Deltek‘s $1.1 billion dollar acquisition, announced Monday by Thoma Bravo, may not have surprised those familiar with the private equity firm’s long history of investing in technology companies. But the timing of the deal and its price tag may come as more of a question in the minds of anyone who works in and around the federal government.
What could Thoma Bravo gain by spending $1.1 billion for a place in the government contracting business given the current spending environment?
“We have a long history of investing in highly respected and industry-leading software companies,” said Orlando Bravo, managing partner at Thoma Bravo. “In Deltek, we found a vertical market leader with unmatched solutions, a loyal and broad customer base, passionate employees and significant organic and acquisition-led growth opportunities,” he said in a release.
But what the company also found is a software and information services firm that is proving to be more valuable than might be expected to contractors and companies trying to navigate through the government’s budget cutbacks.
The state of the government contracting market has actually caused Deltek to see more business, with “very good” growth in each of the past four quarters, said Patrick Smith, Deltek’s vice president of corporate marketing and communications. The tightening federal marketplace has increased Deltek’s value, he argued.
“What Deltek offers becomes even more important in a competitive environment in which you are needing to be more efficient at finding and winning business,” Smith said. “We have a lot of tools to increase that efficiency. The US government is still the largest customer in the world and still a place you want to be.”
Part of what Thoma Bravo is also buying is the outcome of Deltek’s efforts to piece together a plethora of software tools and information services for government businesses through a recent spate of acquisitions since 2009.
Deltek bought Washington Management Group (WMG), and its FedSources (FSI) and FedSources Consulting (FSI Consulting) businesses for $26 million in April of last year. This followed the acquisition of INPUT for $60 million in November 2010 after launching govWin.com earlier that year.
“This was definitely done with a strategic idea in mind,” Smith said. “The acquisitions Deltek has made over the past three to four years have created one-plus-one-equals-three type scenarios for government contracting.”
Thoma Bravo, which bills itself as one of the nation’s most experienced and successful private equity firms, was attracted to Deltek because of “our strong brand and market leadership, world-class solutions, and extraordinary group of customers,” Deltek President and CEO Kevin Parker (pictured above, fourth from left) said in an email to customers.
“Thoma Bravo is committed to investing in our mission of delivering the world’s most innovative and comprehensive solutions for project-focused businesses like yours. It is that commitment that makes Thoma Bravo such a great partner for the future,” Parker said.
“Deltek’s powerful brand presence in the government contractor, professional services, and project-oriented markets makes it well poised for continued global industry leadership,” said Thoma Bravo partner Holden Spaht.
But as with most private equity acquisitions, the investors often see a larger opportunity.
“Our investment strategy is based on the concept of ‘industry consolidation’ or ‘buy and build’ investing which creates value through operational improvements, internal expansion, and the strategic use of acquisitions to accelerate earnings growth,” its management team states on Thoma Bravo’s website.
Thoma Bravo invests in many industries, but specializes in software, business and financial services, education, and other consolidating industry sectors. It has orchestrated a series of private equity investment funds in recent years representing almost $4 billion in committed capital, according to information supplied by the company.
At $13 per share, the offer represents an attractive return to Deltek’s largest shareholder, New Mountain Capital, which holds 100% of Deltek’s Class A stock and 59.5% of the company’s common stock and which consented to the acquisition, which is expected to close during the fourth quarter of 2012.
The offer amounts to a 7% discount to Deltek’s stock price on August 24, 2012 but a 24% premium over Deltek’s stock price on June 11, 2012 – the day before Deltek broadly disseminated information on the sales process to interested parties and their respective advisors on a confidential basis.
After the acquisition closes, Deltek is expected to remain headquartered in Herndon, VA and will continue to be led by its existing senior management team.