Transactional Support and M&A Diligence

[This article was originally published in Law360.]

Amidst the whirlwind of M&A activity in the government contracts industry, a recent bid protest decision from the Government Accountability Office (GAO) highlights the importance of proper planning to protect prime contract proposals during M&A and other corporate transactions.  Last month, GAO denied a protest from ICI Services Corporation (ICI), which challenged the U.S. Navy’s decision to award a task order to Serco, Inc. (Serco) under the SeaPort Next Generation (SeaPort-NxG) vehicle.  Although ICI raised a “multitude of challenges,” GAO focused on what it considered the gravamen of ICI’s protest — that Serco was ineligible for award because it allegedly was not a complete successor-in-interest to the Naval Systems Business Unit (NSBU) of Alion Science and Technology Corporation (Alion).  Serco had acquired the NSBU from Alion in July 2019, and has been operating the NSBU in the several months since then.

For years, contractors have faced an amalgamation of protest decisions assessing the impact of transactions on proposals for new prime contracts.  The recent ICI decision provides some additional guidance and, more importantly, underscores GAO’s stated intent that its decisions not frustrate pending proposals merely because a corporate transaction has taken place or is expected to take place, but instead ensure that the procuring agency has reasonably considered the impact of the transaction and concluded that the resulting contract will be performed in materially the same way as described in the proposal.  In the absence clear guidance in the Federal Acquisition Regulation (FAR) on the treatment of bids in connection with a corporate transaction, GAO’s decision in ICI offers some clarity for contractors and a framework for agencies when assessing the impact of a transaction.  Although every transaction and proposal is unique, the ICI decision highlights some key considerations for contractors.
Continue Reading Buying a Business Without Losing the Pipeline: Further Guidance for Protecting Proposals

(This article was originally published in Law360 and has been modified for this blog.)

Government contractors undergoing an asset transaction know all too well the peculiarity and uncertainty associated with the transfer of a U.S. government contract through the required novation process. In two recent decisions, the Government Accountability Office considered the impact of such transactions and the novation process on the pursuit of new task orders from the U.S. government, with disappointing results for the affected contractors.
Continue Reading More Novation Complexity In Gov’t Contracts M&A?

[This article was originally published in Law360.]

A steady flow of M&A activity in the government contracts industry continues. Indeed, last year we saw over 100 publicly reported deals involving government contractors, and this pace has continued into 2018. This M&A activity has taken a variety of forms, including a number of “carveout” transactions, where a government-focused business is separated from its existing corporate structure. For instance, earlier this month L3 announced an agreement to sell its Vertex Aerospace to American Industrial Partners in what L3 described as an effort to optimize its portfolio of operations. Similarly, last month Siemens’ sold its federal business Dresser-Rand to Curtiss-Wright in order to allow Siemens to refocus on its core strengths.

Whether a carveout is absorbed by another company — such as Lockheed Martin’s sale of its IS&GS business to Leidos — or a carveout results in a new, stand-alone company — such as iRobot’s sale of its robot defense and security government business to private equity firm Arlington Capital, carveout deals can create great opportunities. They can allow a seller to realize the value of the carved-out business, while also creating exciting opportunities for both the remaining and sold businesses to refocus resources on their missions. Also, carving out a business that is less than a natural fit with its larger organization can allow for the realization of synergies if the carved out business is placed in a structure more suited to the carved out business’s specialties.


Continue Reading 4 Considerations For Gov’t Contractor Carveout Deals

In corporate transactions involving government contracts, “novation” has become a dreaded process.  Many buyers and sellers express uneasiness and concern about having to subject their deal to the U.S. Government’s discretionary framework for accepting the transfer of a government contract from one party to another.  In particular, they fear the uncertain timeline and arcane requirements for securing approval.

While the cumbersome novation approval process has drawn significant attention in recent years, the National Defense Authorization Act mark-up released by the House Armed Services Committee earlier this month was again silent on the issue.  In the absence of Congressional enthusiasm, the government contracts bar seems to have focused its efforts to fix the novation process on the Section 809 Panel, which is considering ideas to streamline and simplify the defense acquisition system.  The American Bar Association Section of Public Contract Law offered thoughts on the current novation process in comments to the panel late last year, and it remains to be seen how the Section 809 Panel will react to those comments in the two public reports the Panel is expected to publish over the coming months.

The ABA comments focused on three primary issues with the current novation process under FAR 42.1204:  (1) the timing of novation approvals; (2) corporate entity conversions; and (3) the content of novation packages.


Continue Reading The Future of Novations in Contractor M&A

The U.S. Government’s research and development (“R&D”) spending is on the rise.  For instance, the U.S. Government spent $139 billion in on R&D in FY 2015 and approximately $148 billion in FY 2016.  It is slated to spend as much as $154 billion on R&D in FY 2017.  With this funding comes great opportunities

The Under Secretary of Defense for Acquisition, Technology, & Logistics, Frank Kendall, made seismic remarks last week announcing that the U.S. Department of Defense (DoD) will seek independent authority from Congress to approve or disapprove M&A transactions in the defense industrial base for national security reasons, creating potential shock waves among the companies in that market.

Coming on the heels of Lockheed Martin’s acquisition of Sikorsky Aircraft, the helicopter division of United Technologies Corporation, Mr. Kendall stated that a review focused exclusively on the competitive impact of a transaction does not guard against other mischief caused in the industrial base by the absorption of a smaller company into one of the major DoD prime contractors.  Specifically, Mr. Kendall noted while the absorption of a smaller DoD platform provider into a larger company may not technically reduce competition, the transaction may not be in the best interests of the Defense Department or the taxpayer.  He expressed concern that the largest companies in the defense industrial base use their size — and accompanying clout — to their economic advantage, which, according to Mr. Kendall, has the potential to reduce competition and innovation, limit sources of supply, increase barriers to entry for newcomers to the market, and result in increased costs to the American taxpayers.  According to Mr. Kendall, as the largest companies become larger, the negative impacts on the Defense Department are exacerbated.

Mr. Kendall announced that DoD will seek independent legislative authority to review transactions affecting the defense industrial base from a national security perspective, something not currently a stand-alone consideration in the competitive reviews performed by the antitrust agencies.  While Mr. Kendall acknowledged that the specifics of such a legislative proposal would need to be developed, he stressed the importance of maintaining a robust and innovative defense industrial base, where, he reasons, competition breeds innovation.  Not surprisingly, Mr. Kendall’s remarks have been met with criticism from the industry.


Continue Reading National Security M&A Trump Card for DoD?