Apr 17 2014, 10:34am CDT | by Forbes
While Facebook’s mega-dollar WhatsApp purchase gets more attention, a lower profile acquisition recently announced by Lockheed Martin should be more interesting to middle market companies developing short and long term strategic plans. Last week, Lockheed Martin, one of the world’s largest defense contractors, announced that it expected to complete the purchase of the privately owned cybersecurity firm, Industrial Defender. This deal should be a guide for middle market companies looking for a long or short term exit play.
The transaction seems to be a natural. Although Lockheed Martin is better known for its weapons systems (such as the F-35 Lightning II fighter program), the company’s Information Systems & Global Solutions division has 26,000 professionals with $8.4 billion in sales in 2013 and is the nation’s largest defense technology provider.
Industrial Defender is a relatively small, privately held, 12 year old company that, according to its CEO, Brian Ahern, “was founded on the belief that the challenges of global critical infrastructure cybersecurity, specifically related to mission critical industrial control systems, is unique and requires a very specialized approach.” After spending its early years increasing the awareness of cyber-breaches and evangelizing for the need for security products, Industrial Defender built a reputation on providing cybersecurity solutions for critical commercial infrastructure facilities in the electric, chemical, oil, gas and water utility industries across 25 countries.
Why would Lockheed Martin buy this relatively small company in a transaction with terms that its press release admits are small enough that they are “not material” to Lockheed Martin? Because it is easier to buy expertise than to build it.
Although Lockheed Martin is firmly entrenched in the defense space, it continues to expand its business into the commercial space, and seems to have decided that it is easier to buy 130 employees experienced in commercial cybersecurity than develop its own. The company’s culture is clearly oriented toward public sector needs, and while Lockheed Martin has expertise in cybersecurity, its belief that it needed Industrial Defender’s commercial experience is more than likely driving this transaction. Lockheed Martin expects that the acquisition of Industrial Defender will allow the company to provide a comprehensive set of cybersecurity solutions to both government and commercial customers.
From an economic perspective, this deal will allow Lockheed Martin to fully leverage Industrial Defender’s expertise and capabilities across a much broader sales and marketing platform, which will in turn allow the combined company to grow more quickly.
This is exactly the sort of transaction that middle market ownership groups should keep in mind when they are evaluating both short and long term strategic plans. This deal typifies middle market transactions; not the glamor or riches surrounding highly publicized tech deals.
Successful strategic acquisitions of middle market companies are built around sellers with defined and developed market niches. Industrial Defender typifies this strategic position, having developed a niche expertise and market position that is making it a valuable add-on for a company to whom the economics of the deal are barely a rounding error.
Middle market companies in all sectors can learn from Industrial Defender and their soon to be completed transaction. Whether an acquirer is the nation’s largest defense contractor or a much smaller player in a much small sector, middle market companies ultimately looking for liquidity should strive to provide value that is easier to buy than to build.
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