Last week, New York private equity firm Cerberus Capital Management acquired DynCorp International for $1.5 billion. After GTEC’s successful IPO last year, as well as the high-profile buyouts of ACS, Perot Systems and EDS, it looks like Wall Street is betting on government contractors as a bright spot in an otherwise gloomy economic outlook.
There are several reasons why this is happening now. First, most stimulus funds from the American Recovery and Reinvestment Act (ARRA) went directly to government, either at the state and local or federal agency level, meaning they either went to government employees or government contractors.
Second, while hardware manufacturers have been floundering, professional services firms have been flourishing, leading to vertical integration of products and services in the tech sector. It makes perfect business sense to integrate the two business areas. As Richard Pineda of Dell Perot Systems put it, “Dell and Perot Systems had existing business relationships and had been collaborating on innovative new services for the past two years. Leveraging these relationships among personnel helped create a shared vision about the future.”
Third, while uncertainty over regulation in the global financial markets, the prospect of an extended U.S. presence in Afghanistan and the government’s expanded role in health care produced mixed reactions from the global business community, they were a boon to government contractors. Increased government spending and a mandate to cut costs and improve services make for an almost perfect business climate for government contractors.
We’ll have to see what the rest of 2010 brings, but so far this year has seen Wall Street continue to recognize the strong earning potential of the government contracting industry, based on strong business fundamentals.