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‘Go Big or Go Home’

biz & tech icon

By Jay Friess

biz & tech logoThis is not a time for the faint of heart in the Southern Maryland contracting community, business and banking leaders warned Thursday at a panel event hosted by BB&T Bank at the Lexington Park, Maryland headquarters of Avian Engineering.

“To call the environment for the next year a ‘challenging’ environment is like calling King Kong a big monkey,” said moderator Rich Wilkinson, Director of Government & Technology at Washington, D.C. accounting firm Watkins Meegan.

Mr. Wilkinson advised that is was time for local firms to “go big or go home,” adding, “If you want more business, you got to take it from someone else.”

Tim Garnett, a partner in Avascent Group, a Washington, D.C. management and strategy consulting firm, said the defense market acts like it has entered the fourth stage of the K├╝bler-Ross grief model – depression. “The customer is also very confused,” Mr. Garnett said. “They’re running around, often hiding.”

“Outside this [defense] bubble, the economy is not going great,” acknowledged Kevin Switick, CEO of Avian Engineering, a small, local contracting firm. However, Mr. Switick said there is still money to be made in the defense market, once the budget squeeze of the next few years passes. “I see this as a two to three year bubble that we need to get through.”

In the meantime, Mr. Switick said, the challenge is keeping his best talent engaged and loyal. He said, “Who has the most talent on the other end is going to win.”

Phil Jaurigue, CEO of Sabre Systems, a mid-tier defense contracting firm, agreed, saying, “The fight for talent is at least as paramount as the one for customers.” He said a new $250,000 salary cap for contractors makes the fight harder. “When it comes to talent, you’re sometimes competing with Silicon Valley, sometimes with Hollywood.”

One way of competing for talent in this environment is to merge with another company.

“We’ve been in a 10-year era of consolidation,” said Greg Woodford, Managing Director of BB&T Capital Markets’ Windsor Group. Recently, he said, buyers are getting more picky. “Buyers want access to very specific customers, specific contracts” and are less vulnerable to sequestration, he said. He said that, during the boom, buyers were paying six to ten times a firm’s annual revenue for purchase. That has now dropped to three to four times.

Mr. Jaurigue said his company occupies the “no man’s land” between firms living on small business set-aside contracts and the industry heavyweights. He said he has seen a slowdown in merger activity, and his own firm is getting more selective about purchasing. He said firms with their own “secret sauce,” proprietary capability or intellectual property are most desired.

“The traditional service companies, their values are somewhat depressed unless they have some sort of secret sauce,” Mr. Jaurigue said.

Mr. Switick said his company has grown with a mix of organic and inorganic growth, but is now being very careful. “What we need is to hold onto a little bit of our equity.” Very specialized firms are particularly desirable, he said, but the recent reduction of contracts from five-year to three-year periods will impact firms’ valuations. “It’s that hard choice time,” he said.

The big anomaly facing the industry right now is sequestration, an automatic 10 percent haircut headed for the defense budget if Congress fails to stop it.

“The 800-pound gorilla in the corner that we’ll try not to talk about is sequestration,” Mr. Wilkinson said. He said that the outlook for defense spending, even without sequestration, is bad enough. “The one thing that scares me is that both sides of the aisle think [sequestration] should happen, and they think they can blame it on the other side. Call your Congressman.”

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