The pace at which government contractors are engaging in mergers & acquisitions has increased notably in recent years, as a stream of recent stories in the Washington Post and New York Times have reported. The acquisition of a government contractor frequently provides the buyer an opportunity to increase its market share and/or strengthen its capabilities in an existing industry. The acquisition may also allow the buyer to develop and market a new government contracting capability that was previously lacking from its portfolio.
In the past few months alone, several multi-billion-dollar acquisitions within the government contracts sector have been announced. For example, in September 2017, Northrup Grumman announced it would acquire Orbital ATK, a rocket and defense contractor. Orbital will bring new capabilities to Northrup’s portfolio, including a missile defense business line and the ability to launch rockets that carry satellites into space. The deal, worth $7.8 billion, will also allow Northrup to bolster its existing satellite capabilities.
Similarly, also in September 2017, defense contractors United Technologies and Rockwell Collins announced that they entered into a deal for United Technologies to acquire Rockwell Collins, an airplane electronic and avionics parts manufacturer, for $30 billion. Through the transaction, UTC Aerospace Systems, which will be renamed Collins Aerospace Systems, will bolster its aerospace capabilities and technology aerospace systems.
Companies and private equity funds seeking to expand their portfolios through the acquisition of large, medium, and small government contractors, however, must take particular caution through the due diligence process, because such acquisitions are fraught with potential land mines that can slow down or even disrupt the proposed transaction. When a company seeks to acquire an entity that holds government contracts, both parties must comply with several different sets of federal regulations to ensure that the government approves of the transaction; recognizes the buyer as a successor-in-interest for the seller’s government contracts or subcontracts; that all compliance obligations transfer to the buyer; and that the buyer is capable of fulfilling its new compliance responsibilities to the satisfaction of the government.
Some of the common issues that arise in government contracts mergers & acquisition include:
- Analysis of the remaining years and/or receivables under existing and prospective government contracts held by the entity to be acquired
- The novation or assignment of the government contracts from the entity to be acquired to the buyer
- The potential loss of small or other socio-economic preferences for the award of government contracts as a result of the acquisition
- Transfer of facility and top-secret clearances
- Intellectual property owned by the entity being acquired, or the government, and whether the rights can be transferred
- Organizational conflicts of interest, which may prevent the buyer from bidding on new contract opportunities
- Whether the company’s Federal Supply Schedules are up-to-date and compliant with specific regulations, like the Price Reduction Clause
- Which subcontracts and teaming agreements the entity to be acquired holds, and are they compliant and enforceable
- Foreign buyers: CFIUS notification and foreign ownership and control mitigation plans
- Past performance ratings of the company to be acquired by government agencies, and the impact of those ratings on the buyer’s ability to win other government contracts
- Prior suspensions or debarments that may affect the company to be acquired
- Disclosure of and indemnification for any contractual or regulatory non-compliance that predates the transaction, including violations of the False Claims Act
Failure to resolve these and similar compliance issues; to analyze and address any of the financial impact from any status change that may be caused by the transaction; or to obtain the necessary government approvals prior to transfer of government assets, may result in the loss of business opportunities for the buyer or merged entity, and in certain situations can result in suspension or debarment of the contractor, or civil and/or criminal penalties. Experienced and careful government contracts due diligence, however, can identify these and other risks in the transaction, ensure that the parties obtain adequate disclosures and indemnifications, make thorough and accurate representation and certifications, and obtain all necessary approvals from the government so that the proposed acquisition is successful and profitable.