Accounting Analysis of Purchase Price Allocations for Government Contracting M&A Transactions. November 2004

Transcription

1 Accounting Analysis of Purchase Price Allocations for

2 Contents I. Purpose, Procedures & Highlights II. Accounting for Purchase Price Allocations a) 5 Types of Intangible Assets b) In-Process Research and Development (IPR&D) III. Analysis of Data a) Intangible Assets as a % of Purchase Price b) Customer Related Intangible Assets c) Amortization Periods d) Disclosed Transaction Costs Appendix The McLean Group Profile 1

3 I. Purpose, Procedures & Highlights This analysis is a summary of recent accounting trends and techniques of purchase price allocations for government contracting M&A transactions. Purpose Since June 2001, intangible assets have been required to be identified and separately valued as part of the accounting for M&A transactions. Due to the uniqueness of the government contracting industry and the relatively new accounting rules, the issue has caused difficulties and differences in the financial reporting of acquisitions. The accounting for government contracting transactions has resulted in significant amounts of goodwill and intangible assets relative to the purchase price. Customer related intangible assets (such as: customer contracts, customer base, backlog, and/or customer relationships) have been especially difficult to record. Government Contracting Transactions The government contracting industry is a very broad sector and can include many types of businesses. For this analysis, we focus on transactions related to businesses that primarily provide IT and related services to the federal government. This analysis purposefully excludes businesses that primarily provide equipment or other manufactured products. 2

4 I. Purpose, Procedures & Highlights (cont.) Sources of Information Data in this analysis is based on 31 M&A transactions that were obtained from the following SEC filings : Anteon International, 10-K (12/31/03) PEC Solutions, 10-K (12/31/03) CACI, 10-K (6/30/04) Perot Systems, 10-K (12/31/03) Dynamics Research, 10-K (12/31/03) SI International, 10-K (12/27/03) ManTech International, 10-K (12/31/03) SRA International, 10-K (6/30/04) MCT Technologies, 10-K (12/31/03) TITAN, 10-K (12/31/03) Purchase Price The purchase price used in this analysis is net of any disclosed capitalized transaction costs. Transactions costs were not disclosed or accounted for in a consistent manner. Disclaimer This analysis is intended to provide general financial information, not specific accounting or financial advice. The readers of this analysis take full responsibility for the conclusions that they may draw from it. 3

5 I. Purpose, Procedures & Highlights (cont.) Highlights of the accompanying analysis include: 86% of the purchase price represents goodwill and identified intangible assets. 70% of the purchase price represents goodwill. The description of identified customer related intangible assets (customer contracts vs. customer base vs. customer relationships vs. backlog) is not consistently disclosed. Non-compete agreements and tradenames, if any, are infrequently valued. Technology related or IPR&D intangible assets, if any, have not been valued. Disclosed transaction costs (of the buyer) range from 0.4% to 4.5% of the purchase price, with an average of 2.1%. 4

6 II. Accounting for Purchase Price Allocations Purchase Accounting With the release of SFAS 141, Business Combinations, intangible assets must be separately identified and valued at Fair Value. The purchase price from a transaction must be allocated to the acquired net assets. Tangible Assets Tangible assets (such as accounts receivable, fixed assets, and other net assets) are valued at Fair Value, which may not necessarily reflect the accounting book value. Identified Intangible Assets Intangible assets are separately recognizable if they are capable of being separated due to their legal or contractual nature or because they meet the separability criterion. Identified intangible assets must meet the separable and transferable test. Identified intangible assets are amortized over their estimated useful lives. Unidentified Intangible Assets Goodwill is the remaining balance, if any, that results if the purchase price in a transaction exceeds the Fair Value of acquired tangible assets and acquired intangible assets that are separately identified. Goodwill is not amortized, but subject to annual impairment testing on a reporting unit basis. 5

7 II(a). 5 Types of Identified Intangible Assets Marketing Related intangible assets include: trademarks, tradenames, certification marks, logos, and non-competition agreements. Customer Related intangible assets include: customer lists, backlog, customer contracts, and customer relationships. Artistic Related intangible assets include: books, magazines, plays, literary works, musical works, pictures, photographs, and audiovisual materials. Contract Based intangible assets include: licensing agreements, royalty agreements, management contracts, lease agreements, construction permits, franchise agreements, broadcast rights, and land use rights. Technology Based intangible assets include: patented technology, computer software, internet domain names, un-patented technology, databases, and trade secrets. 6

8 II(b). In-Process Research & Development Control and Economic Benefit - In accordance with purchase accounting, the Fair Value of in-process research and development ( IPR&D ) should be estimated and the related asset capitalized. IPR&D should be separately recognized if they have characteristics of control and expected economic benefit. An acquiring company s interest in IR&D is controllable if it can obtain benefit from the asset and control access to the asset. Acquired IPR&D has economic benefit when the acquiring company can demonstrate that the assets will be used for post-combination activities. Measurability - Further, IPR&D must be measurable, that is, it must be able to be estimated with reasonable certainty. The economic benefit expected from the IPR&D effort must be sufficiently determinable such that a reasonably reliable estimate of the future expected net cash flows can be made based on assumptions that are verifiable. For example, a reasonably reliable estimate of Fair Value may be established if the following seven components can be estimated with confidence: 1. A market for the product; 2. Time needed to commercialize and market the product; 3. Potential customers and market penetration; 4. The effect of competitors existing or potential products; 5. The combined enterprise s share of the market; 6. The selling price; and 7. Production and related costs for the product. 7

9 III(a). Intangibles as a % of Purchase Price Customer Related Intangibles % Other Intangibles % Goodwill % Total Goodwill and Intangibles as a % of Purchase Price Date Buyer Target Purchase Price 7/20/2001 Anteon Training Division of SIGCOM 11,000, ,000 4% 0% 8,100,000 74% 78% 5/23/2003 Anteon Information Spectrum 91,600,000 4,751,000 5% 500,000 1% 74,335,000 81% 87% 5/1/2004 CACI American Management Systems 420,700,000 61,000,000 14% 0% 328,800,000 78% 93% 3/1/2004 CACI CMS Information Services 28,200,000 3,000,000 11% 0% 18,300,000 65% 76% 1/16/2004 CACI MTL Systems 4,400, ,000 16% 0% 1,900,000 43% 59% 10/16/2003 CACI C-CUBED Corporation 36,200,000 6,400,000 18% 0% 19,500,000 54% 72% 8/16/2002 CACI Condor Technology 16,200,000 4,700,000 29% 0% 10,300,000 64% 93% 10/16/2002 CACI Acton Burnell 29,400,000 6,300,000 21% 0% 17,600,000 60% 81% 2/23/2003 CACI Applied Technology Solutions 13,100,000 2,200,000 17% 0% 9,600,000 73% 90% 5/15/2003 CACI Premier Technology Group 48,800,000 14,700,000 30% 0% 19,300,000 40% 70% 6/6/2003 CACI Rochester Information Systems 1,900, ,000 31% 0% 2,400, % 158% 11/1/2001 CACI DSIC 47,000,000 8,100,000 17% 0% 23,000,000 49% 66% 12/20/2002 Dynamics Research ANDRULIS 24,572,000 1,300,000 5% 1,340,000 5% 20,549,000 84% 94% 5/31/2002 Dynamics Research HJ Ford 10,251,000 1,400,000 14% 400,000 4% 6,162,000 60% 78% 2/28/2003 ManTech Integrated Data Systems 65,558,000 7,500,000 11% 0% 50,707,000 77% 89% 12/11/2002 ManTech CTX Corporation 35,487,000 4,000,000 11% 400,000 1% 25,981,000 73% 86% 8/5/2002 ManTech Aegis Research Corporation 69,085,000 2,700,000 4% 0% 60,033,000 87% 91% 10/18/2002 MCT Technologies AMCOMP Corporation 8,570,000 3,025,000 35% 0% 6,698,000 78% 113% 10/1/2003 MCT Technologies International Consultants 10,206,000 3,500,000 34% 0% 10,642, % 139% 10/24/2003 MCT Technologies Vitronics 8,964,000 2,500,000 28% 0% 4,919,000 55% 83% 11/20/2001 PEC Solutions Troy Systems 18,293,753 3,025,000 17% 0% 9,921,799 54% 71% 1/1/2002 PEC Solutions Vector Research 5,800, % 4,300,000 74% 74% 11/3/2003 TITAN Advent Systems 12,100, % 10,100,000 83% 83% 3/21/2002 TITAN Jaycor 103,500,000 2,000,000 2% 1,900,000 2% 38,100,000 37% 41% 11/21/2001 TITAN BTG 135,500,000 8,200,000 6% 0% 139,200, % 109% 9/28/2001 TITAN Datron 48,900,000 5,800,000 12% 1,600,000 3% 22,700,000 46% 62% 1/4/2002 SRA International Marasco Newton Group 15,900,000 2,200,000 14% 0% 11,700,000 74% 87% 1/31/2003 SRA International Adroit Systems 38,363,000 4,629,000 12% 0% 24,516,000 64% 76% 1/04 SRA International ORION Scientific Systems 34,500,000 8,400,000 24% 0% 26,600,000 77% 101% 2/20/2003 PEROT Systems Soza & Company 76,662,000 12,200,000 16% 0% 54,115,000 71% 87% 7/1/2002 PEROT Systems ADI Technology 38,672,000 2,393,000 6% 0% 26,914,000 70% 76% High 35% 5% 126% 158% Mean 16% 1% 70% 86% Median 14% 0% 73% 83% Low 2% 0% 37% 41% 8

10 III(b). Customer Related Intangibles Date Buyer Target Purchase Price Customer Related Intangibles % Notes on Descritption of Customer Related Intangible Assets 7/20/2001 Anteon Training Division of SIGCOM 11,000, ,000 4% Described as contract backlog. 5/23/2003 Anteon Information Spectrum 91,600,000 4,751,000 5% Described as contracts and customer relationships. 5/1/2004 CACI American Management Systems 420,700,000 61,000,000 14% Description of identified intangible assets not disclosed. 3/1/2004 CACI CMS Information Services 28,200,000 3,000,000 11% Description of identified intangible assets not disclosed. 1/16/2004 CACI MTL Systems 4,400, ,000 16% Description of identified intangible assets not disclosed. 10/16/2003 CACI C-CUBED Corporation 36,200,000 6,400,000 18% Description of identified intangible assets not disclosed. 8/16/2002 CACI Condor Technology 16,200,000 4,700,000 29% Description of identified intangible assets not disclosed. 10/16/2002 CACI Acton Burnell 29,400,000 6,300,000 21% Description of identified intangible assets not disclosed. 2/23/2003 CACI Applied Technology Solutions 13,100,000 2,200,000 17% Description of identified intangible assets not disclosed. 5/15/2003 CACI Premier Technology Group 48,800,000 14,700,000 30% Description of identified intangible assets not disclosed. 6/6/2003 CACI Rochester Information Systems 1,900, ,000 31% Description of identified intangible assets not disclosed. 11/1/2001 CACI DSIC 47,000,000 8,100,000 17% Description of identified intangible assets not disclosed. 12/20/2002 Dynamics Research ANDRULIS 24,572,000 1,300,000 5% Described as customer relationships. 5/31/2002 Dynamics Research HJ Ford 10,251,000 1,400,000 14% Described as customer relationships. 2/28/2003 ManTech Integrated Data Systems 65,558,000 7,500,000 11% Described as contract rights. 12/11/2002 ManTech CTX Corporation 35,487,000 4,000,000 11% Described as contract rights and capitalized software. 8/5/2002 ManTech Aegis Research Corporation 69,085,000 2,700,000 4% Described as contract rights. 10/18/2002 MCT Technologies AMCOMP Corporation 8,570,000 3,025,000 35% Described as a customer contract and non-compete covenant. 10/1/2003 MCT Technologies International Consultants 10,206,000 3,500,000 34% Described as customer contracts. 10/24/2003 MCT Technologies Vitronics 8,964,000 2,500,000 28% Described as customer contracts. 11/20/2001 PEC Solutions Troy Systems 18,293,753 3,025,000 17% Described as customer contracts and related relationships. 1/1/2002 PEC Solutions Vector Research 5,800, Not disclosed. 11/3/2003 TITAN Advent Systems 12,100, Not disclosed. 3/21/2002 TITAN Jaycor 103,500,000 2,000,000 2% Described as backlog and customer relationships. 11/21/2001 TITAN BTG 135,500,000 8,200,000 6% Described as backlog, customer relationships, and a strategic relationship. 9/28/2001 TITAN Datron 48,900,000 5,800,000 12% Described as backlog and customer relationships. 1/4/2002 SRA International Marasco Newton Group 15,900,000 2,200,000 14% Description not disclosed. 1/31/2003 SRA International Adroit Systems 38,363,000 4,629,000 12% Described as contract rights. 1/04 SRA International ORION Scientific Systems 34,500,000 8,400,000 24% Description not disclosed. 2/20/2003 PEROT Systems Soza & Company 76,662,000 12,200,000 16% Description not disclosed. 7/1/2002 PEROT Systems ADI Technology 38,672,000 2,393,000 6% Description not disclosed. 9

11 III(c). Amortization Periods Customer Related Amortization Period (years) Non-Compete Agreement Amortization Period (years) Technology Amortization Period (years) Tradename Date Buyer Target 7/20/2001 Anteon Training Division of SIGCOM 440, /23/2003 Anteon Information Spectrum 4,751, , /1/2004 CACI American Management Systems 61,000, /1/2004 CACI CMS Information Services 3,000, /16/2004 CACI MTL Systems 700, /16/2003 CACI C-CUBED Corporation 6,400, /16/2002 CACI Condor Technology 4,700, /16/2002 CACI Acton Burnell 6,300, /23/2003 CACI Applied Technology Solutions 2,200, /15/2003 CACI Premier Technology Group 14,700, /6/2003 CACI Rochester Information Systems 595,000 up to 10 11/1/2001 CACI DSIC 8,100, /20/2002 Dynamics Research ANDRULIS 1,300, ,340, /31/2002 Dynamics Research HJ Ford 1,400, , /28/2003 ManTech Integrated Data Systems 7,500, /11/2002 ManTech CTX Corporation 4,000, , /5/2002 ManTech Aegis Research Corporation 2,700, /18/2002 MCT Technologies AMCOMP Corporation 3,025,000-10/1/2003 MCT Technologies International Consultants 3,500, /24/2003 MCT Technologies Vitronics 2,500, /20/2001 PEC Solutions Troy Systems 3,025,000-1/1/2002 PEC Solutions Vector Research /3/2003 TITAN Advent Systems - - 3/21/2002 TITAN Jaycor 2,000, ,900, /21/2001 TITAN BTG 8,200, /28/2001 TITAN Datron 5,800, ,600, /4/2002 SRA International Marasco Newton Group 2,200,000-1/31/2003 SRA International Adroit Systems 4,629, /04 SRA International ORION Scientific Systems 8,400,000-2/20/2003 PEROT Systems Soza & Company 12,200,000-7/1/2002 PEROT Systems ADI Technology 2,393,000 - Amortization Period (years) 10

12 III(d). Disclosed Transaction Costs Date Buyer Target Purchase Price Transaction Costs % 7/20/2001 Anteon Training Division of SIGCOM 11,000, , % 5/23/2003 Anteon Information Spectrum 91,600, , % 5/1/2004 CACI American Management Systems 420,700,000 5,700, % 12/20/2002 Dynamics Research ANDRULIS 24,572,000 1,100, % 5/31/2002 Dynamics Research HJ Ford 10,251, , % 2/28/2003 ManTech Integrated Data Systems 65,558,000 1,000, % 12/11/2002 ManTech CTX Corporation 35,487, , % 8/5/2002 ManTech Aegis Research Corporation 69,085, , % 11/20/2001 PEC Solutions Troy Systems 18,293, , % High 4.5% Mean 2.1% Median 1.6% Low 0.4% 11

13 Appendix The McLean Group Profile 12

14 The McLean Group Profile M&A Services Buyer and seller representation in merger, acquisition, and divestiture transactions. Specific services include: - Buy-side/sell-side M&A services - Recapitalizations - Management/leveraged buyouts - Capital formations Business Valuation Valuation services for a variety of financial, transaction and tax purposes, including: - Fairness opinions - Stock option plans - Purchase price allocations - Tax and estate purposes Litigation Support Business valuation expertise is applied to support a variety of litigation and arbitration cases involving legal issues such as: - Dissenting/oppressed shareholder suits - Marital dissolutions - Lost profit and lost asset values - Intellectual property Executive Advisory For business owners seeking ways to enhance shareholder value, The McLean Group offers a variety of value maximization services including: - Value enhancement strategic planning - Pre-transaction planning - Restructurings and turnaround support - Operational audits 13

15 The McLean Group Profile (cont.) A middle market investment bank Small and highly focused (20 personnel) Relatively few M&A clients at one time (typically 6 to 9) NASD registered broker/dealer (all bankers maintain Series 7 and 63 licenses) Deep industry expertise and extensive relationships Government Contracting Technology Telecommunications Travel, Hospitality and Food Services Business and Professional Services Unique technical depth: CPAs, CFAs, MBAs, certified valuation experts, and national valuation and M&A instructors 14

16 Select M&A Transactions 15

17 Select Business Valuations 16

18 Contact Information Andrew C. Smith, CPA/ABV, CVA, CMA Director, Valuation Services 1660 International Drive, Suite 450 McLean, VA Main: (703) Fax: (703) Dir: (703)