All this aside, remember that we’ll have to do this again in short order and there will effectively be a new type of contracting crisis once the budget does get passed as agencies will have less than six months to complete their contracting and acquisition priorities for 2011.

As mentioned, the M&A front has been extremely active over the last month. Publicly open about its openness to acquisition, SRA International (SRX) agreed to be acquired by private equity firm Providence Equity for $31.25 per share in cash, a total value of $1.88 billion. Another public firm GTEC, also was acquired and taken private by Ares Management, and will now be called Sotera. Good luck to John, Joe, and Ron, as they continue to build that rapidly growing platform! And this continues the major theme of the last year we have seen in the market – major purchases and activity by private equity groups (PEGs) in the federal market.

Our friends at Deltek followed up on their earlier purchase of federal research firm INPUT by snaring their main competitor, FedSources, as well. To go a little faster… CSC acquired iSoft, SAIC announced plans to divest nearly $200M of commercial business, KEYW acquired JKA, NCI bought AdvancedMed, BAE purchased Fairchild Imaging. Take a breath… And… Harris continued its acquisition spree and picked up communications firm Core180, PEG backed Salient completed its second acquisition (of Command Information), ManTech bought TranTech, and Lockheed divested its PAE division to PEG giant Lindsay Goldberg.

So there you have it… let’s see what the next 24 hours bring or if a lot of our government friends will have free time to watch the NHL playoffs kick off next week!!"

Cameron Hamilton, AVA
Principal

A great summary of the budget is provided for free by our friends at INPUT (recently purchased by Deltek) at input. Overall, administration officials are toeing a reduction line. OMB Director Jacob Lew said yesterday at a press briefing that simply keeping DoD with “no real growth” will save roughly $78 billion annually. Helping that figure is cost savings from reducing money spent on costly major weapon systems, like the C17 Tanker Aircraft, that the department finally admits are not crucial to national security. Additionally, planned withdrawals from Afghanistan and Iraq should reduce government spending by at least 5% less this year versus years past.

Overall, the FY12 budget sent to Congress yesterday calls for approximately a 10-12% cut on money allocated toward contractors, which will force companies to rethink how they operate. This slowdown in organic growth necessitating inorganic growth strategies combined with the recent extension on capital gains tax rates should continue to provide fuel for a strong year for M&A activity. There are areas such as cybersecurity, health care IT, and continued IT modernization efforts at various agencies, that provide solid budgets going forward and strong growth opportunities for contractors. Companies operating in these areas should continue to see strong demand and valuation multiples going forward.

Of note in the M&A space, large SI integrator SRA International (NYSE: SRX) confirmed that it is considering bids to be acquired.  BAE Systems and Serco have both been linked to these discussions.  Last week, the industry saw another four deals announced, highlighted by leading UK defense firm Meggitt plc buying a division of serial acquirer Danaher, Pacific Scientific Aerospace.  As well, another private equity firm, LLM Capital Partners, acquired Hybrid Design Associates, a maker of high-reliability electronic assemblies for military and commercial customers.

The passage of the bill extending the tax cuts took significant pressure off merger and acquisition activity that was being pushed to get done prior to year end.  So the busiest quarter for M&A activity in the federal services marketplace in over two years ended with a number of announcements prior to 12/31, but still saw a number of deals get announced this week to start 2011.  CSC, CDI, Rockwell Collins, and BAE all were among notable companies announcing acquisitions in the last ten days of the year.  A notable deal was Tailwind Capital’s acquisition of Ericsson Federal, highlighting the end to a very busy year for private equity investing in the space.  The first week of the New Year saw Cubic Corp (XIO Strategies), A-T Solutions (Innovative Technology Systems), ICF International (Marbek Resource Consultants), and Pragmatics (ISI) announce deals as well.

PRESS RELEASE

USTC Holdings, LLC, an investor consortium led by private equity firms Forte Capital Advisors (”Forte”) and Manhattan Partners (”Manhattan”), announced today that it has acquired Xe Services, LLC (”Xe” or the “Company”) and its core operating subsidiaries. Xe is a leading provider of training and technical services focused on worldwide diplomatic security operations. The terms of the agreement were not disclosed.

As part of the transaction, USTC Holdings, LLC will acquire the Xe companies that provide domestic and international training, as well as security services. This will include the Company’s state-of-the-art training facility in Moyock, N.C., which is widely regarded as the preeminent training facility in the world and is unmatched in the quality and scope of the training services provided. Over 50,000 U.S. government personnel have been trained at the facility as well as numerous allied forces.

Jason DeYonker, Managing Partner of Forte, said, “Xe provides indispensibletraining and expertise to government and commercial entities around the world. I have a deep appreciation and respect for the quality of Xe’s employees and the valuable services they provide our country. We look forward to partnering with management to realize our collective vision for Xe’s future.”

DeYonker has unique experience with the Company that dates back to its founding in the late 1990s. He advised the Company through development of its early business plan and expansion of the Moyock training facility as well as supporting negotiations of its first training contracts with U.S. government agencies. Between 1998 and 2002, Mr. DeYonker co-managed Xe founder, Erik Prince’s family office which included management of Mr. Prince’s portfolio companies. Mr. Prince, the sole selling owner and member, will divest the entirety of his equity stake through the transaction and will not be involved in the management or operation of the Company. The Company going forward will be managed by aBoard appointed by the equity owners which will include independent, unaffiliated directors.

DeYonker added, “The future of this industry belongs to those companies with the highest standards of governance, transparency, and performance. Our vision for Xe is to set the bar against which all other companies in our industry are measured.”

Dean Bosacki, Managing Partner of Manhattan, said, “Xe is an absolutely unique asset, and is recognized as ‘best in class’ by many of the Company’s elite customers. We are excited to complement the Company’s management team who are committed to professionalism and ethical conduct wherever the Company operates.”

This change of ownership does not affect the previously announced Consent Agreement between Xe and the U.S. Department of State’s Directorate of Defense Trade Controls. As part of the agreement, Wendy Wysong, a partner at Clifford Chance LLP, will continue to serve as Special Compliance Officer for the Company and will oversee the export compliance program at Xe.

Bingham McCutchen acted as legal counsel to USTC Holdings and the Chertoff Group incollaboration with Avascent Group performed strategic due diligence on USTCHoldings’ behalf.

Financing for the transaction was led by Bank of America Merrill Lynch.

About Xe

Xe is a leading global stability services provider. Founded in 1997, the Company has grown from a basic training facility to support the needs of local and regional law enforcement personnel to a world-class provider of training and security services to public and private entities the world over. Xe’sheadquarters in Moyock, N.C. house the largest private training center in the U.S.

About USTC Holdings, LLC

USTC Holdings, LLC is an investment holding company led by Forte Capital Advisors and Manhattan Partners formed for the sole purpose of facilitating the acquisition of Xe and its core operating subsidiaries. Forte Capital Advisors combines private equity with experienced and active management in the investments in which the firm participates. In addition to a select portfolio of investments, Forte provides transaction and financial advisory services to growing middle market companies.

Manhattan Partners is a progressive thinking private equity firm focused on control equity investments in high growth and transitional businesses. The firm hasglobal experience across private equity, corporate finance, M&A, entrepreneurship, and operations. The firm’s Managing Partners are entrepreneurs as well as investors, with an expectation to be intensely engaged in the management and growth of each portfolio company.