The D.C. region has suddenly emerged as a hotbed of activity for tech mergers and acquisitions.
Over the last five weeks alone, no fewer than 10 deals involving Greater Washington tech companies have been completed or announced.
Industry observers say there are more deals to come in large part due to buyers' growing interest in tech-focused national security players or cybersecurity firms, many of which are based in the D.C. region. Additionally, the year-long pause in the Federal Reserve's interest rate hikes combined with healthy stock market returns has given investors more confidence to pursue M&A.
"Every M&A deal has to be based on assumptions about revenue, profit, sales, future market and those are easier to predict if there's stability," said David J. Berteau, the president and CEO of the Professional Services Council, a trade group representing government contractors. "What you see right now is there's enough stability that people can do a business plan, a business model and say 'here's where the deal makes sense to us.'"
Andrew Lustig, a partner based in the Reston office of the law firm Cooley LLP, told me roughly a dozen deals involving local tech firms have already crossed his desk this year — a marked increase from this time in 2023 — and even more are on the way.
"There's a lot going on in the national security, dual-tech space here and I think that's being fueled by a lot of the defense and [intelligence] communities and all of the stuff that's going on globally," Lustig said, referencing Russian's invasion of Ukraine, the conflict in the Middle East as well as general threats from China.
He added that while the D.C. region's private equity sector has "historically been very active" in this space, PE firms from outside the region have shown an increased interest in adding or expanding cybersecurity, unmanned systems and space tech sectors to their portfolios — interest that will continue to grow regardless of who sits in the White House or which party controls Congress.
"I do think a good confluence of factors all kind of contributed to where we sit today and what's been kind of a building a sense of momentum in the M&A market here," Lustig said.
The biggest deal struck so far came on June 20, when Charlotte, North Carolina-based Honeywell announced it is buying Arlington aerospace components manufacturer CAES Systems Holdings LLC from Boston private equity firm Advent International for $1.9 billion in cash.
Also in June, government IT contractors MindPoint Group LLC of McLean and ClearCloud LLC in Reston, were acquired by larger private equity-backed competitors and Reston IT contractor Hubble Technology Inc. was bought by Minneapolis cybersecurity firm NetSPI.
Lustig said it's not just the number of deals that's noteworthy, though. While deal prices aren't always disclosed, he noted that many of the companies that do end up selling are fetching "a lot of money" in the process.
"These are not fire sales or distressed deals," he said. "These are deals where there's auctions or there's premiums being paid or buyers are paying good market prices and people are doing well on the exits, which is also really a good sign."
Most of the M&A activity has involved government contractors, but other tech companies in the region are also capturing buyers' attention. For example, German construction software provider The Nemetschek Group just paid $770 million for GoCanvas Holdings Inc., a smaller Reston competitor, in a deal that closed on July 2. That resulted in a hefty payday for K1 Investment Management, a Los Angeles private equity group that acquired GoCanvas for about $100 million in 2018.
The Professional Services Council's Berteau said he expects government contractors will remain attractive acquisition targets because federal agencies are good clients that pay their bills on time. But he had one warning for investors: Those steady payments could dry up in the event of an extended government shutdown or, worse, the U.S. defaults on its debt.
There's a perception on Wall Street that the government "is going to deploy a parachute and [contractors] will land safely," he said. "That works up until the day it doesn't. I don't see a lot of people talking about that in the investment community."
