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<\/p>\nIt\u2019s a frequent dilemma in corporate strategy.\u00a0 A company knows it wants to expand to a new business area \u2013 but how? Should the company look to make an acquisition to enter the space?\u00a0 Or would it be better to start a new business line from scratch?\u00a0 One government services contractor, PAE Inc. (\u201cPAE\u201d), was faced with this dilemma as it decided whether to pursue higher-end, technologically advanced contracts in addition to more traditional logistics and operations & maintenance contracts.<\/p>\n
Government services contractors have historically been integral in assisting US Government agencies achieve missions critical to the security of the United States.\u00a0 PAE was founded in the 1950s to support the U.S. government\u2019s efforts to rebuild Japan following World War II (1).\u00a0 Since then PAE has expanded its services to provide Life Support Services at the US embassy in Iraq, to bolster the operations of the Navy\u2019s submarine testing facility, and to refurbish helicopters for the US border patrol.\u00a0 In doing so, PAE became a trusted partner with the US Department of Defense (\u201cDoD\u201d), Department of State, and Intelligence Agencies (2,3,4).<\/p>\n
In recent years, these same government departments asked services contractors to bring a new kind of capability to crucial missions: high-tech services.\u00a0 While the DoD commonly used large manufacturing contractors to produce high-tech vehicles and weapons throughout history, the DoD has increasingly demanded technology to be delivered as a service, in functions such as cybersecurity and systems integration.\u00a0 The missions have remained as serious as before, however.<\/p>\n
Supporting serious US Government missions like these new high-tech services contracts fit well with PAE\u2019s business model and mission statement: \u201cproviding enduring support for the essential missions of the U.S. government, its allied partners and international organizations.\u201d\u00a0 PAE has delivered on its mission though a customer-centric operating model.\u00a0 It has worked to understand a customer\u2019s needs, and then executed reliably and at an excellent level.\u00a0 PAE then used this performance to cultivate long-term relationships with its government customers.\u00a0 At the same time, PAE expanded its capabilities, so that when customers had additional needs, they turned to PAE (5).<\/p>\n
Since expanding into high-tech services fit with PAE\u2019s business and operating models, the company needed to decide whether to seek to grow this business organically, or whether to look to acquire a business in the space.\u00a0 One feature of the services contracting industry helped make this decision: government agencies awarded contracts based on contractors\u2019 past-performance in a given contract area.\u00a0 If PAE couldn\u2019t plausibly argue that its experience qualified it for high-tech services, then PAE wouldn\u2019t be able to win any contracts or grow its business.\u00a0 PAE therefore decided to look to acquire a business with the past performance needed to establish it in the high-tech services space.<\/p>\n
It found not one, but two businesses to acquire.\u00a0 One was A-T Solutions, a high-tech national security company with experience in biometric-enabled intelligence, counter-IED (improvised explosive device, and counterterrorism more broadly (6).\u00a0 The other was GS&S, a carve-out acquired from a distressed parent prior to its bankruptcy.\u00a0 Among other capabilities, GS&S performed digital litigation support services for the Department of Justice (7).\u00a0 PAE decided to combine these two acquisitions into a new National Security Solutions segment (\u201cNSS\u201d), under the leadership of a new hire \u2013 Kenneth Myers, the outgoing director of DTRA (Defense Threat Reduction Agency) (8).\u00a0 While biometrics has little to do with litigation support, PAE and Myers presumably determined that these two high-tech services businesses had more in common with each other than with PAE\u2019s legacy business.\u00a0 Additionally, a separate NSS segment may better position the business for future growth.<\/p>\n
When PAE entered the high-tech services space, it decided to do so through acquisition.\u00a0 Now that it has entered, what is next?\u00a0 PAE has stated that it is looking to expand the next NSS segment.\u00a0 Should it once again pursue additional acquisitions?\u00a0 Or is there another way?<\/p>\n
The decision may once again already made for PAE, though with the opposite implication.\u00a0 PAE\u2019s new private equity owner, Platinum Equity, recently executed a dividend recapitalization, leaving PAE with $710 million in debt \u2013 significantly more debt than the business has ever serviced (9).\u00a0 The resulting high leverage may make it difficult for PAE to finance additional acquisitions, at least in the near-term.\u00a0 This may not be a bad thing, however.\u00a0 Historically, high-tech cybersecurity firms have tended to sell for high valuations (10).\u00a0 Thus, additional acquisitions could be a very expensive way to grow, when a cheaper option exists: grow organically.\u00a0 Indeed, presumably that is the mandate of the new NSS President, Kenneth Myers.\u00a0 By leveraging the past performance of the two acquisitions, as well as Meyers\u2019 knowledge of the inner workings of government agencies, PAE can continue to expand its high-tech services offering in years to come.<\/p>\n
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Bibliography:<\/u><\/p>\n It\u2019s a frequent dilemma in corporate strategy.\u00a0 A company knows it wants to expand to a new business area \u2013 but how? Should the company look to make an acquisition to enter the space?\u00a0 Or would it be better to […]<\/p>\n","protected":false},"author":1926,"featured_media":20244,"comment_status":"open","ping_status":"closed","template":"","categories":[],"class_list":["post-20243","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/digitization-challenge-2016\/","yoast_head":"\n\n