Government IT Services Market Update – February 2024

Revenue Visibility Underpins Buyer Appetite for Government IT Market Businesses

Capstone’s latest Government Information Technology (IT) Services Market Update reports that bipartisan congressional support for modernization initiatives in the Government IT market has bolstered the non-cyclical nature of the space. Despite a regression in sector merger and acquisition (M&A) volume in 2023, healthy government contract flow for prime contractors has offered favorable projections for transaction activity in 2024.

Systems modernization has continued to be a leading driver of growth in the Government IT Services sector. Bipartisan support through the introduction of the Modernizing Government Technology (MGT) Reform act has the potential to create sustainable funding mechanisms for outsourced contracts. Additionally, robust backlogs and book-to-bill ratios of leading public companies in the space have highlighted the persistent demand for broader sector services from government customers. Market participants have tailored their operational capabilities towards the most in-demand government services such as IT systems modernization, cybersecurity, software development, and intelligence. In particular, CACI International (NYSE:CACI) has diversified its competencies across the sector, with recent contract wins due to the company’s increased investment in software development services. Any proliferation of multi-year, high-value contracts for leading players will likely benefit middle market businesses through increased subcontracting opportunities.

M&A volume in the Government IT Services sector cooled in 2023, falling 18.8% year-over-year (YOY) to 91 transactions announced or completed. Broader M&A trends in 2023 were not favorable compared to previous years, as total volume in the M&A market declined 24.1% YOY in 2023. High borrowing costs and a tepid exit environment helped slow transaction volume. Amid the drop in M&A appetite in 2023, the Government IT Services sector managed to exceed pre-pandemic and broader market levels. Businesses with high revenue visibility were frequently targeted during 2023, as an opaque macroeconomic environment forced buyers to prioritize targets with consistent financial performance. A proven contract waterfall remained a key criterion for buyers evaluating acquisitions. The flight to quality resulted in robust valuations for M&A in the sector, with the average enterprise value for deals in the space reaching $957.5 million in 2023, a 10.4% YOY increase. A costly debt environment placed significant pressure on leveraged buyouts, forcing sponsors to prioritize add-on acquisitions (36.3% of total transactions) over new platform deals. Sponsors who completed platform deals (12.1%) in 2023 largely used the transaction’s proceeds and the financial profile of the target to execute buy-and-build strategies.

Also included in this report:

• An exclusive interview with Capstone client OPS Consulting.
• A breakdown of public company performance in the sector.
• Which segments of the Government IT Services space have been experiencing the most M&A activity.

Capstone Partners’ Aerospace, Defense, Government & Security (ADGS) Investment Banking Team provides M&A, capital formation, and financial advisory services to the owners of middle market businesses in the Government IT Services Market. Our team partners with leading mid-to-large sized businesses that serve growing end-markets.

For more information on the Government IT Market trends featured in this report or to speak with one of our ADGS M&A Team members about how to grow, value, and/or sell your company, we are here to help. Contact us today.