Automatic Cuts Called ‘Catastrophic’ for Contractor Dealmaking

December 4, 2011

Across-the-board budget cuts triggered by the failure of Congress's deficit-reduction supercommittee might discourage acquisitions of companies that depend on federal contracts.

The cuts, on top of previous measures, would reduce the Defense Department budget by about $1 trillion over 10 years. That might diminish the value of potential acquisition targets working on big-ticket Pentagon programs, said John Hagan, head of the defense and government services group at BB&T Capital Markets in Reston. Those involved in intelligence, cybersecurity or health care might be insulated from cuts and hold their value, he said. 

The automatic reductions will be "catastrophic'' for buyouts of contractors, because the cuts will lower company valuations and hurt the ability to finance deals, said Jean Stack, a McLean-based managing director for Houlihan Lokey, an investment bank in Los Angeles. Lower values won't necessarily make companies more attractive as acquisition targets because of uncertainty over future revenue, she said. 

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