DISTRICT OF COLUMBIA: An Introduction to Corporate/M&A & Private Equity

The Washington DC Economy 

Many outsiders think of Washington DC as a government town. In fact, the DC metropolitan area has a thriving business community. At the end of 2020, a total of twenty-four companies in the S&P 500 and twenty-six companies in the Fortune 500 had their headquarters in the Baltimore-Washington-Richmond corridor. According to the Bureau of Economic Analysis, the DC metropolitan area’s GDP ranks in the top five of the nation, behind only New York, Los Angeles, Chicago and San Francisco.

It is true that the government is a major driver of commercial activity in the DC area. A large number of local companies operate in the defense and aerospace sector or provide goods and services to federal government agencies. These companies range from very large publicly traded companies that are household names, such as Lockheed Martin, General Dynamics and Northrop Grumman, to small, privately held businesses.

But other industries also have a strong presence in the DC area, creating a vibrant and diversified economy. The hotel sector, to name one, plays a significant role. Choice, Hilton and Marriott all have their headquarters in the Washington suburbs, as do a number of publicly traded hotel REITs. Large and small technology companies have thrived here for many years, and Maryland is well known for its dynamic life sciences, healthcare and pharmaceutical sectors. In addition, businesses that are headquartered in other places have long seen the area as an attractive location for additional operations. For example, Amazon recently opened its second headquarters in Arlington, Virginia, and Nestlé established its US headquarters in the same community.

Industry Sectors in the DC Area that Generate High Deal Volume

Not surprisingly, the industry sectors that play a large role in the local economy also generate significant amounts of M&A activity. In 2019, transactions involving government contractors accounted for four of the five largest acquisitions by DC-based companies. In 2020, they accounted for three of the five largest acquisitions. The defense industry has been consolidating for many years, as government contractors seek to gain market share, take advantage of synergies and improve their ability to win new business. This consolidation trend is evidenced not just by big deals but also by a high volume of deals involving smaller companies.

The technology sector in the DC area also contributes significantly to deal volume. In recent years, technology-related M&A accounted for roughly one-third of total deal volume. Technology M&A overlaps to some degree with government contractor M&A because many local tech companies focus on developing new technologies for, or providing technology services to, the government. The life sciences, healthcare and hotel industries also contributed to deal flow over the past few years, although to a less substantial extent.

Private equity firms have a significant presence in the DC region and also drive M&A activity. A number of firms with a focus on the defense and aerospace industries have their principal offices in the Washington area. The Carlyle Group is a prominent example, and there are other locally-based private equity firms, including Arlington Capital, that also invest in this space. In addition, a number of firms headquartered outside the Washington area that focus on defense and aerospace investments spend significant resources pursuing DC-based targets.

The DC area has also seen the rise of private equity firms, growth equity funds and other institutional investors, including ABS Capital and Revolution Capital, that focus on technology and other investment opportunities outside the defense market. These investors are particularly frequent players in deals involving local technology companies.

The Relationship between the DC and National M&A Markets, and the Impact of the Pandemic on M&A

To a great extent, the DC M&A market tracks the national M&A market. If the global market is hot, the DC market is also likely hot. And if the national market is cold, the DC market is also likely cold. During 2020, this relationship held firm. Both national and DC M&A activity levels were quite high at the beginning of the year. But when the pandemic struck at the end of the first quarter and the US economy entered lockdown, deal volumes dropped precipitously. Strategic buyers and sellers put M&A efforts on hold and focused instead on ensuring that their businesses could weather the storm. Private equity firms reacted in similar ways.

In the third and fourth quarters of 2020, however, as the business outlook improved, deal-making resumed. Buyers and sellers re-engaged, and new deals started entering the pipeline. This trend continued through the beginning of 2021.

The M&A Outlook for the Washington DC Economy

M&A activity should continue at high levels for at least the next year. Now that companies have some confidence that the economy is on an upward track, they are reviewing their strategic plans. On the buy-side, they are pursuing opportunities for inorganic growth through M&A. On the sell-side, they are considering whether it makes sense to sell non-core or underperforming business units or assets. Companies that were particularly hard hit by the pandemic may decide to sell assets, seek new strategic or financial partnerships or even put their entire business on the block.

The SPAC boom is likely to have a significant impact on M&A volumes and may help create a seller favorable market. SPACs have a relatively short time frame for finding an attractive target before they are required to unwind and return investor dollars – generally just two years – so they are likely to pursue deals aggressively. Even if the pace at which new SPACs are being formed slows down significantly, the SPACs that are already in the marketplace searching for M&A targets will drive activity levels higher. As of the end of the first quarter of 2021, more than 400 already-public SPACs were looking for deals.

Private equity firms are likely to be very active as well. They have significant amounts of capital that they would like to deploy and are hunting for new investment opportunities. If the M&A markets remain hot, they may see attractive exit opportunities and consider selling portfolio companies.

Activists were relatively quiet during the pandemic, but seem to have returned in full force. They are once again pressing companies to consider M&A opportunities. This pressure should also contribute to activity levels.

On the flip side, government regulation may reduce demand for deals. US antitrust regulators at the Federal Trade Commission and the Department of Justice are expected to take a more aggressive approach to antitrust enforcement. The government has indicated that it will review vertical mergers more aggressively than in the past. In addition, CFIUS may take a tougher stance on deals involving foreign investors. Similar trends are at work in Europe and Asia, and are likely to have an impact on cross-border deal-making.