Arlington Capital Partners, seeing private equity’s success in the government IT space in recent years, made its move to enter the arena itself with the acquisition of ITS Services in April, which represents its first acquisition from its $75 million reserve committed to the sector. The firm teamed up with industry veterans Todd Stottlemyer, Paul Leslie and Phil Odeen for the acquisition.
Terms of the deal were not disclosed, although Jeffrey Freed, managing director of Arlington, said he expects the firm to make several other federal IT acquisitions using the reserve funds. He noted that for the ITS deal, Wachovia, Allfirst Bank and Citizens Bank provided a senior debt facility, while Allied Capital provided mezzanine debt and a small equity contribution.
Private equity’s move into the government-contracting arena corresponds with the LBO market’s flight to quality, as the federal IT sector generally provides consistent returns. Michael Legg, a government IT analyst with Jefferies & Co., said that with market growth, increased government spending and future consolidation within the industry, the sector represents an attractive opportunity at this time. “Bottom line, it’s a great environment for companies in this space,” he said.
A number of buyout shops have already cashed in on the sector, as it is one of the few groups that has received any interest on the IPO market in recent years. Last year, Caxton-Iseman Capital, Frontenac Company, Veritas Capital and Monitor Clipper Partners all rolled out IPOs of government IT companies.
But don’t expect a quick IPO. “We did not invest in the IT space with the intention of racing to the public market,” Freed said. “An IPO is a possibility, but we won’t operate this company with an eye to the public markets.” He added that it was likely Arlington would pursue a strategic sale for its exit, but noted the firm is currently concentrating on building the business.
And while Arlington may not be looking to take the same route as some of the aforementioned firms, Freed noted that Caxton-Iseman’s Anteon International investment is a good example of what the firm is trying to create with ITS Services. ITS operates in three core areas of the government IT space, including enterprise architecture, network services and operations, and software and applications development. The company takes in revenues of more than $70 million annually, and according to Michael Lustbader, vice president at Arlington, “is more profitable than the average public IT defense company.” The company is also showing upward momentum in recent years, with double-digit annual growth in both revenue and profits.
In growing the business, Arlington will rely heavily on the management team assembled, which will be structured with Stottlemyer as CEO, Leslie serving as president and COO and Odeen as chairman. All three previously served in executive positions at BDM International, a federal IT services provider, and Odeen most recently was the chairman of TRW prior to its merger with Northrop Grumman. Freed said, “We believe with this team that we have the level of expertise necessary to assimilate and run the size of company that we’re contemplating.”
Arlington, according to Freed, will try to make ITS into a “leading mid-tier” company in the government IT space with $300 million to $500 million in revenues in the next couple of years. The firm will pursue this through acquisitions that diversify its offerings, although Lustbader insisted that Arlington won’t chase acquisitions simply for the sake of growing the business. “This is not by any means a rollup,” he said, noting that Arlington will only pursue strategic targets that fit snug with the business.
Washington-based Arlington used its $452 million Arlington Capital Partners LP fund, which still has more than half of its capital remaining for future investments. The firm has been active in recent months, with the acquisition of Fort Wayne, Ind.-based NBC affiliate WKJG in January through its New Vision platform company. Arlington also expects to announce the closing of another investment in the aerospace and defense sector shortly.