By, Lawrence Block, Esq., Partner at Reed Smith in the Washington DC office and Elizabeth Leavy, Esq., Associate at Reed Smith in the Washinton DC office.
The pace at which government contractors are engaging in M&A activity has increased notably in recent years. In the past few months alone, several multi-billion-dollar acquisitions within the government contracts sector have been announced.
Government contractor acquisitions frequently provide buyers with increased market share and/or strengthens capabilities. Such acquisitions can also develop a new government contracting capability for an acquirer’s portfolio.
Recent transactions include Northrup Grumman’s $7.8 billion acquisition of Orbital ATK, a rocket and defense contractor and United Technologies’ $30 billion acquisition of Rockwell Collins, an airplane electronic and avionic parts manufacturer.
Companies and private equity funds seeking to expand their portfolios through acquiring government contractors must take particular caution through the due diligence process.
Both parties to such a transaction must comply with several different sets of federal regulations to ensure that the government approves of the transaction; recognizes the buyer as a successor-in-interest for the seller’s government contracts or subcontracts; that all compliance obligations transfer to the buyer; and that the buyer is capable of fulfilling its new compliance responsibilities to the satisfaction of the government.
Common issues arising during government contracts M&A include the transfer of facility and top-secret clearances, the novation or assignment of government contracts, and whether IP rights may be transferred, among others.
Potential acquirers must also determine which subcontracts and teaming agreements a target holds, and are such contracts and agreements compliant and enforceable.
With respect to foreign buyers, notifying CFIUS and foreign ownership and control mitigation plans must be considered.
The failure to address any financial impact from any status change caused by a transaction, or to obtain the necessary government approvals prior to the transfer of government assets may carry serious consequences.
These consequences may include the loss of business opportunities for the buyer or merged entity, suspension or debarment of the contractor, or civil and/or criminal penalties.
Experienced and careful government contracts due diligence can identify risks in the transaction, ensure that the parties obtain adequate disclosures and indemnifications, make thorough and accurate representation and certifications, and obtain all necessary approvals from the government so that the proposed acquisition is successful and profitable.