So-called B2G segment seen as recession proof and in need of a secure supply chain
By Marlene Givant Star, James Ward and Philip Segal
M&A activity has been especially strong for service businesses centered around the government procurement supply chain, according to industry experts.
Kevin Robbins, a partner with private equity firm Blue Delta Capital Partners, said there is a huge emphasis on the “secure supply chain,” where the Department of Defense and intelligence communities have become obsessed with verifying where every transaction originated – from software and technology to goods and even capital.
The Trump Administration’s ongoing trade tension with China and expected Russian meddling in US elections are among the factors driving the trend.
In late November the Department of Commerce issued a notice of proposed rulemaking and requested comments on the implementation of an executive order signed by President Trump in May. The order is meant to secure the information and communications technology and services supply chain.
“There is a lot of saber-rattling around expanding the CFIUS (Committee on Foreign Investment in the United States) review,” said Robbins, referring to the agency that reviews the national security implications of foreign investments in U.S. companies or operations.
One potential addition would be to set up a secure marketplace for venture firms that have already been vetted by the DoD, ensuring there is no foreign influence, he said. No such marketplace exists at this stage.
“It’s a good time to be in our field,” said Ben Vaught, CEO of DemandStar, a government procurement tech platform. “There will be more activity in the business-to-government space,” he added. B2G valuations and the amount of government work available are also on the rise, Robbins added.
Vaught estimated that 8 percent of U.S. GDP spending crosses the desk of a state or local government buyer.
Many companies involved in B2G are either on the block or being bought by private equity, he noted, citing Scout RFP, which was acquired by Workday, Inc. last month in an all-cash transaction for $540 million. Scout does request for proposal (RFP) automation, similar to what DemandStar does for connecting businesses to government RFPs, he noted.
Sonatype, based in Fulton, Maryland, announced last month that it had received a majority investment from Vista Equity Partners. (See table.) Four out of the five U.S. Armed Forces service branches use the company’s products, which provide open source health and hygiene data, which is aggregated from public and private sources using sophisticated machine learning and artificial intelligence.
Recent deals in B2G
Recent deals in B2G
*Data from Jan 2018 through 25 Nov 2019
Robbins said the sale resulted in “double-digit returns” for previous owner Blue Delta.
Other pockets of the B2G space have seen a flurry of activity this year as well, such as technology for automating regulatory filing and compliance tasks that used to be done with pen and paper. In February, Bonfire Interactive was merged into GTY Technology Holdings and taken public. In May, Post Capital acquired PROCHAMPS, a provider of property registration technology.
Meanwhile, other large players in the procurement space are adding to their management ranks. When announcing its new CEO in September, Mediagrif Interactive Technologies, a Quebec-based information technology company, said it was making public sector procurement a key focus.
And Parthenon Capital-backed Periscope Holdings recently announced a senior leadership hire with David Landsman coming onboard to oversee the company’s new online shopping platform exclusive to the public sector, which he said would help government agencies increase competition very quickly.
Another company expanding in the B2G space is Edgesource. In late October, Bret Cohen, general counsel of the Alexandria, Virginia-based cybersecurity company told Mergermarket the company was introducing, through its new Tier One unit, a certification process for all defense contractors in parallel with a program introduced by the DoD effective June 2020.
“Deal activity remains strong across the board and private equity just continues to be a significant presence in the industry,” said Greg Woodford, senior managing director of The McLean Group’s Aerospace, Defense and Government Services practice.
Woodford said exit multiples are extremely high right now, too.
“2019 has been a very good year,” he said. “We’ve seen a big uptick in pitch activity which means we will see a lot of deals going to market” in early 2020.
Marlene Givant Star is New York editor-Sector coverage, for Mergermarket and Dealreporter. She can be reached at [email protected].
James Ward covers B2G and business services (B2B) from Charlottesville, Virginia. He can be reached at [email protected].
Philip Segal is the Head Analyst for Mergermarket – Americas based in New York. He can be reached at [email protected].