News Notes November 2009

Global Defense Technology & Systems, Inc. (Nasdaq:GTEC) Joins the Public Companies Ranks.

The public market segment for companies that do business with the U.S. Government has fared far better than the general market in the past decade—but it has a tenuous and fragile nature to it.  Leaving aside the Tier I contractors such as Lockheed Martin, there has been a group of legitimate middle market companies (about 7 or so, depending on who’s counting) that provide a lot of juice to the entire government market.  They depend on growth, which means they feed on a steady diet of acquisitions, often funded by private equity groups.  At any given time, there are least a dozen public market wannabes which may be graduated 8A’s or new private equity funded companies.  Having a healthy group of middle market public companies is good for the whole industry.  There have been considerable ‘comings and goings’ in these years including the disappearance by acquisition of Veridian, Anteon, SI International,  MTC Technologies and others.  Others like ICF and Stanley have stepped up to replenish the numbers.

But it is not all that easy to keep the numbers up with IPO’s being so difficult to accomplish and the Government sector always having its skeptics in the investment world—precisely because the end customer is the Government.  So, it was good to see GTEC get the job done for $39M at the end of November—but not without pain in this mostly gun-shy IPO market.  Like another stock that day, GTEC priced slightly below its range.  The over-allotment granted to the underwriters (which included our own Stifel Nicolaus) was never exercised, which means that the underwriters did not have excess demand for the new stock.  Despite the battle the underwriters may have fought to place the stock, GTEC stock has risen respectably and healthily since November.

The parent company and sponsor for GTEC was and is a company called Global Strategies Group.  Readers get to sit in the front of the class if you can determine the exact location and domicile of Global Strategies Group.  My best guess is that it is a worldwide defense-oriented conglomerate, formed by a former Royal Marine Commando, and therefore headquartered in the UK—-yet registered in Luxembourg.  Global Strategies sold 1.6 million secondary shares in the offering and still controls over 40% of GTEC.  This is not a bad strategy for the conglomerate, because, as many of you know, when you are a foreign company owning a U.S. Defense Department provider, you have many disadvantages, not the least of which is having to maintain an insulated and separate board of directors.  Global Strategies has opted for minority ownership, some cash in the pocket, and the benefits of guaranteed future cooperation in its global markets.

Finally, I had to laugh when I saw that GTEC pulled Jim Allen out of retirement last spring in order to tee up this IPO.  Jim is one of the most accomplished CFO’s in the region, having worked his deal magic at GRC, CACI and Veridian.  No better choice to get the books and story in line for an IPO.  You can also see that Ron Jones, also of Veridian ancestry and now head of corporate development, had a big role in creating GTEC.  Jim has threatened permanent retirement at least three times.  He will pretend to tell you that he would like to play more golf, but he has a bad back that makes that answer totally suspect.  Some people have a way of never letting on that they just can’t let go of the work, the camaraderie

and the game.

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