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Q22021QUARTERLYM&AREPORT
The McLean GroupPremier middle market investment bank
The McLean GroupPremier middle market investment bank 2
Our trusted team of financial professionals provides middle-market clients with transaction advisory services, business valuationservices, and growth capital to help them reach their short and long-term goals.
The McLean Group is a 25-year-old boutique investment bank and financial services firm focused on the Defense, Government &Intelligence (DGI); Physical & Cyber Security; Critical Infrastructure; and Maritime Transport & Facilities markets. Our 60+ professionalsbring deep industry experience and relentless execution to every client engagement. We provide solutions that blend financialcreativity with operational expertise. Whether we are providing transaction advisory, valuation opinions, or growth capital, our servicesare unmatched in these core markets.
Our clients are special, and their missions are often vital to national security. They are required to be excellent at all times, and theyexpect the same from their transaction advisor.
Q22021QUARTERLYM&AREPORT
The McLean GroupPremier middle market investment bank 3
─ DGI: The FY 2022 Budget highlighted investments in technologyas a continued key focus of the government. This focus is beingsupported by various initiatives including the American RescuePlan for the U.S. Digital Services.
─ Security: Recently, there has been a surge in discussionssurrounding cyber security and the nation’s ability to deterforeign threats. $500M of the Budget has been apportioned tothe Technology Modernization Fund to continue operations asthe predominate conduit for enhancements to cybersecuritydefenses. Additional investments include $9.8B in cybersecurityfunding and $15.0M for the Office of the National Cyber Director.
─ Critical Infrastructure: The Federal Budget takes aim to revamp astrategic array of infrastructure with a sizeable focus ontransportation. It calls for the modernization of 20,000 miles ofhighways, roads, and main streets; the repairment of the 10 mosteconomically critical bridges; and the upgrade of ports of entryand other transit lines.
─ Priorities: The top increase to agency funding has been in theeducation sector with the enactment of the American FamiliesPlan which notably includes 4 additional years of education forevery American. Following the Department of Education (EDU),the Department of Commerce (DOC) has seen a close to 30%increase in the Federal Budget - credited to the DOC’s counter-cyber crime initiatives.
-12.9%-4.1%
1.6%1.6%
3.6%5.6%6.6%
8.2%9.4%9.5%9.6%
10.8%12.4%13.3%13.8%
16.7%16.8%
19.8%21.2%
23.6%29.3%29.4%
39.8%
USACEDHS
DEFENSEDOT
TREASDOJ
NASAVA
SBAUSDA
SSASTATE
OPMDOLHUDDOI
DOENSFEPAHHSGSADOCEDU
$703.7B $715.0B
$887.5B $806.0B
$1,591.2B $1,521.0B
FY 2021 (Estimate) FY 2022 (Estimate)
-4.4%
%ChangebyAgency,FY21- FY22
Q22021QUARTERLYM&AREPORT
The McLean GroupPremier middle market investment bank 4
Sources: Defense News, ASD News, Defense.gov, Aljazeera, Wall Street Journal
RELEVANTNEWS&COMMENTARY,CONTD.
─ NATO leaders declared China a global security challenge at Summit inBrussels. China’s goals and recent behavior present issues to the rule-based international order. Global leaders believe that China’s rapiddevelopment of nuclear missiles and use of disinformation poses athreat to global security. To counter the security risks caused by theChinese military buildup in the Indo-Pacific, the U.S. budget hasprovided $5.1B for the Pacific deterrence initiative. The Chinesemilitary buildup has resulted in a shift to submarines as surface shipsare more vulnerable to China’s increasing missile capabilities.Additionally, the “Clean Green Initiative”, originally pushed for byPresident Biden, is a G-7 backed plan with the purpose of rivalingChina’s infrastructure strategy, the “Belt and Road Initiative”. Overall,NATO defense focuses are shifting away from the Middle East andmore towards China.
─ Department of Defense plans to review its missile defense systemsupon growing threats from Iran, North Korea, Russia, and China. Withthese nations maturing their missile technology, the U.S. wants toevaluate the capabilities, strategies, and policies of their missiledefense systems. This review will act as a look into how the U.S canimprove and have effective missile defense for both homeland andregional defense. Results of this review may present opportunities forgovernment services and defense engineering companies.
─ Global Target Drone market value to reach $10.5B by 2031. From 2021 to2031, the market value is expected to grow by a CAGR of 8.8%. The targetdrone market is continuing to grow rapidly, mainly due to the adoption ofunmanned systems for military operations and advancements in militarytraining by companies who are increasing their focus through organic andinorganic growth.
─ In mid-June, Deputy Defense Secretary, Kathleen Hicks, announced the DoDAI and Data Acceleration (ADA) Initiative. Through this initiative, DoD islooking to rapidly advance data and AI dependent concepts. Hicks and herteam are looking to create operational data teams that will be dispatched toall combatant commands. This initiative is part of the Federal Government’scontinued focus on developing and funding technologies of the future.
─ Pentagon ends the JEDI cloud project amid Amazon court battle. The JEDIcontract was awarded to Microsoft and valued at up to $10.0B over 10 years.Amazon had been battling for the contract in court since 2019. The legaldispute between Amazon and the courts officially concluded on July 6th withthe cancellation of the JEDI cloud project by Pentagon officials. The fall of theJEDI project has brought light to a new project named “Joint WarfighterCloud Capability”. This project aims to target similar cloud computingcapabilities as the JEDI project intended, but with multiple vendors ratherthan a single vendor award. In addition to Microsoft and Amazon, officialshave said qualified bidders could include Alphabet Inc.’s Google, Oracle Corp.and IBM Corp. Contract protests have been increasing in recent years and arebeginning to hamper the government’s ability to efficiently procure goodsand services as well as contractors ability to efficiently win work.
Defense,Government&IntelligenceOverview
Q22021QUARTERLYM&AREPORT
The McLean GroupPremier middle market investment bank 5
Source: S&P Capital IQ1. For composition of indices, see pages 9-10
TMGCUSTOMINDICES
─ The Defense Primes index has made significant headway in their recovery from the COVID-19 pandemic, but still trail the S&P 500 by 29.2%over the last 12 months. The drag on Defense Primes stock performance was directly associated with their exposure to the aerospaceindustry, which has subsided and given way to hampering exposure to troop draw downs in the Middle East.
─ With the confirmation of last quarter’s anticipated flattening of DoD budget, Defense Primes and Defense Systems indices are expected tohave limited opportunities for growth. Yet with a rapidly changing political landscape and ever-increasing global threats, both indices willremain ever so important for the protection of the United States.
─ The Middle Market Government Services and Government Contractors indices have remained relatively steady due to existing strategicinitiatives by the Federal Government including those focusing on cybersecurity and IT modernization.
MarketCommentary
Defense Primes MM Gov’t Services Gov’t Contractors Defense Systems S&P 500
The McLean GroupPremier middle market investment bank 6
Sources: DACIS, S&P Capital IQ(A) – announcement date
TRANSACTIONSBYMONTHNotablePrecedentTransactions
DEFENSE,GOVERNMENT&INTELLIGENCE
Deal volume in 2021 Q2 was relatively flat as many buyers moved toalign their capabilities with the Biden administration’s new spendingpriorities through inorganic growth.
Although deal volume remained strong, there were fewer mega dealsthis quarter. Deal volume was fueled primarily by the middle market,which has remained extremely active as many small and mediumbusiness owners attempt to exit before a potential capital gains taxincrease at the end of the year. We expect the remainder of 2021 to bestrong from a deal volume perspective as tax considerations continue.
Date: 5/28/2021
EV: $1, 4B
EBITDA Multiple: ND
Subsector: Government
Services
KeyStatistics
Date: 6/11/2021
EV: $725.0M
EBITDA Multiple: ND
Subsector: Government
Services
KeyStatistics
Date: 6/1/2021
EV: $84.2M
EBITDA Multiple: 11.00x
Subsector: Defense
Supplier
KeyStatistics
Date: 6/10/2021 (A)
EV: $203.0M
EBITDA Multiple: ND
Subsector: Government
Services
KeyStatistics
acquired by
Date: 6/1/2021 (A)
EV: $1.0B
EBITDA Multiple: ND
Subsector: Government
Services
KeyStatistics
acquired by
Date: 6/2/2021
EV: $250.0M
EBITDA Multiple: ND
Subsector: Government
Services
KeyStatistics
acquired by acquired by
acquired byacquired by
Q22021QUARTERLYM&AREPORT
The McLean GroupPremier middle market investment bank 7
The McLean GroupPremier middle market investment bank
─ On May 6, a criminal organization used a ransomware attack todisrupt network assets and steal data from Colonial Pipeline, whichprovides 45% of gasoline, jet fuel, and other petroleum to the EastCoast.
─ Facing the threat of its data being released and unable to billcustomers, Colonial paid 75 bitcoin (~$4.4M) in ransom one daylater (5/7). Unfortunately, Colonial’s network was too damaged,and the decision was made to shut down operations for repairs.
─ Operations were restarted six days later on May 12. On June 7, theFBI announced that it had recovered 63.7 of bitcoins from theransom which had decreased in value to $2.2M.
─ This attack evidences the increasing sophistication ofcybercriminals and the vulnerability of our national infrastructureto cyberattacks.
─ A main focus of President Biden’s at the June 16, G7 summit wasthe delineation of boundaries with international cyber crimes –particularly relating to incidents surrounding criticalinfrastructure (Food, Energy, Healthcare and Telecom). Thisaction comes as numerous politicians, including Senator Schumerand Gillibrand, push for increases to cybersecurity budgets. Theinflux of attention to cybersecurity threats may drive furtheractivity in the space.
─ Lawmakers reintroduced a bill on June 15 that would ban federalagencies from using biometric technology, including facialrecognition systems, and withhold funding for state and local lawenforcement agencies that use such technology. Proponents ofthe technology, including law enforcement, claim that it is aninvaluable tool, especially for tracking down suspects thatotherwise might be tough to identify.
─ Cyber criminals have recently begun targeting the infrastructuresector and interfering with operations. Sizeable breaches include:
─ On May 30, the largest meatpacking company in the world,JBS, paid $11.0M in ransom to cybercriminals after an attackshut down plants that process a fifth of U.S.’s meat supply.
─ Puerto Rico’s primary power distributor suffered a cyberattack that left >900,000 people without power. The denial-of-Service (DoS) attack flooded servers with close to 2million hits per second.
─ Up to 1,500 companies were compromised by a ransomware attack onKaseya. On July 2nd, REvil, a Russian cyber-criminal group usedransomware to attack Kaseya, an IT software company. This sameRussian cyber-criminal group has been linked by the FBI to the attackin May on JBS USA. The Kaseya attacks directly impacted nearly 60 ofKaseya’s customers which then compromised an additional 1,500 smallto medium-sized businesses that are associated with Kaseya’s directcustomers. The attacks did not impact any critical infrastructurecompanies but did result in the directing of all government resourcesto assist in the response by President Biden. As these cyber-attackscontinue to grow in frequency, the United States government shows apressing need for continued cyber-security capabilities.
Q22021QUARTERLYM&AREPORT
The McLean GroupPremier middle market investment bank 13
Source: S&P Capital IQ1. For composition of indices, see pages 18-19
─ The Security Services index is slowly rebounding from the adverse affects of COVID-19. While the companies comprising the index have nottrended as high as the S&P 500, their Security Services divisions have seen substantial growth. Despite auxiliary segments dampening thegrowth figures of the overall companies, the index closely trailed the S&P 500 this quarter.
─ Personal security concerns have deepened as reports suggest 2020 having the largest one-year increase in homicides – leading to an uptickin home security systems. The demand for these systems is further fueled by the ongoing activity in the real estate market.
─ With global cyber-crime rates increasing exponentially, companies and governments are vamping up investments in digital security tocombat the orchestrated attacks that aim to interrupt critical operations.
TRAILINGTWELVEMONTHS(TTM)PUBLICEQUITYINDEXCHART1
Q22021QUARTERLYM&AREPORT
The McLean GroupPremier middle market investment bank 14
TRANSACTIONSBYMONTHNotablePrecedentTransactions
PHYSICAL&CYBERSECURITY
The M&A deal flow during 2021 Q2 in the physical and cyber securitysector has moderately decreased relative to last quarter. Despite theshift in volume, the focus on investing in cybersecurity is incessant –potentially fueling the next several quarters.
The most prominent deal during Q2 was the announcement of ThomaBravo’s acquisition of Proofpoint. Not only does this deal make historyas the largest private equity cloud purchase, but it also highlights thegrowing market size of the cybersecurity industry.
acquired by
Date: 4/26/2021 (A)
EV: $12.4B
EBITDA Multiple: 258.47x
Subsector: Cybersecurity
KeyStatistics
acquired by
Date: 5/12/2021
EV: ND
EBITDA Multiple: ND
Subsector: Cybersecurity
KeyStatistics
acquired by
Date: 5/6/2021 (A)
EV: $9.6M
EBITDA Multiple: ND
Subsector: Cybersecurity
KeyStatistics
acquired by
Date: 5/20/2021
EV: ND
EBITDA Multiple: ND
Subsector: Security
Solutions
KeyStatistics
acquired by
Date: 6/9/2021
EV: $850.0M
EBITDA Multiple: ND
Subsector: Cybersecurity
KeyStatistics
acquired by
Date: 4/1/2021
EV: $213.0M
EBITDA Multiple: ND
Subsector: Security Services
KeyStatistics
Q3 2020
33
Q4 2020
48
Q1 202146
Q2 202133
1213
8
21
8
17
21
1512
8
1312
Jun. 2
1
May
21
Apr. 21
Mar.
21
Feb.
21
Jan. 2
1
Dec. 20
Nov. 2
0
Oct. 20
Sep.
20
Aug. 20
Jul. 2
0
Sources: S&P Capital IQ(A) – announcement date
Q22021QUARTERLYM&AREPORT
The McLean GroupPremier middle market investment bank 15
The McLean GroupPremier middle market investment bank 20
Sources: Wall Street Journal, GlobeNewswire, Engineering News-Record, WWD
RELEVANTNEWS&COMMENTARY
BIPARTISANINFRASTRUCTUREBILL
─ The EPA has announced the opening of fifth-round fundingapplications for infrastructure financing. The Water InfrastructureFinance and Innovation Act (WIFIA) program aims to reduce thehigh cost of capital as it pertains to water infrastructureupgrades. A total of $6.5B will be available to eligible borrowers.
─ The U.S. Dept. of Transportation has selected 24 transportationinfrastructure projects in 18 states to share $905.3M of fundingin the latest round of its popular Infrastructure for RebuildingAmerica, or INFRA, grant program. These grants provide a portionof the project costs and are further funded by local governments.This round of grants targeted areas of historical investment, suchas rural areas which received 44% of the funding.
─ On June 29, the Supreme Court ruled in favor of Penn East, ajoint venture of several energy companies who since 2014 havebeen seeking to build a 116-mile pipeline through PA and NJ. Theruling restores a status quo giving the energy industry, underFERC oversight, power to use eminent domain to help buildpipelines that cross state lines.
─ A heat wave this month has 9.8% of the country in “exceptionaldrought” - the most severe designation. These conditions havespread beyond the typical areas of the southwest up to statessuch as Washington where water infrastructure has not beendesigned to face these conditions, leading to more state officialsconsidering conservation as part of their water infrastructure.
─ On June 24, a group of ten bipartisan senators reached a deal onthe framework for an infrastructure package that totals nearly$1.2T over 5 years.
─ The plans includes $400.0B in baseline transportation spendingthat is renewed by Congress and $579.0B in new spending, ofwhich $312.0B will go towards transportation projects and$266.0B will go towards utility infrastructure projects.
─ The bill is expected to be paid for in part by repurposing existingfunds, public-private partnerships, and enhancing collectionenforcement at the Internal Revenue Service.
The McLean GroupPremier middle market investment bank 21
TRANSACTIONSBYMONTHNotablePrecedentTransactions
CRITICALINFRASTRUCTURE
M&A deal flow in the second quarter of 2021 has relatively stabilized,when compared to the past twelve months. Albeit the decrease involume of transactions since the fourth quarter of 2020, severalenvironmentally-conscious water companies have been acquired. Thefollowing quarter will likely see a similar trend in tandem with Biden’spush towards reducing emissions.
A prevalent case of expanding operations to further address globalinfrastructure concerns was SEEIT’s $261.0M acquisition of Red-Rochester, who provides comprehensive utilities in Rochester, NY.
acquired by
Date: 5/4/2021
EV: $420.0M
EBITDA Multiple: ND
Subsector: Infrastructure
KeyStatistics
acquired by
Date: 6/23/2021
EV: ND
EBITDA Multiple: ND
Subsector: Environmental Services
KeyStatistics
acquired by
Date: 5/17/2021
EV: $150.0M
EBITDA Multiple: 2.21x
Subsector: Water
KeyStatistics
acquired by
Date: 5/21/2021
EV: $261.0M
EBITDA Multiple: ND
Subsector: Power and Water
KeyStatistics
acquired by
Date: 6/9/2021 (A)
EV: ND
EBITDA Multiple: ND
Subsector: Infrastructure
KeyStatistics
acquired by
Date: 4/1/2021
EV: ND
EBITDA Multiple: ND
Subsector: Power
KeyStatistics
Q3 202079
Q4 2020107
Q1 202188
Q2 202166
2022242322
4346
2833
29
21
29
Jun. 2
1
May
21
Apr. 21
Mar.
21
Feb.
21
Jan. 2
1
Dec. 20
Nov. 2
0
Oct. 20
Sep.
20
Aug. 20
Jul. 2
0
Source: S&P Capital IQ(A) = announcement date
Q22021QUARTERLYM&AREPORT
The McLean GroupPremier middle market investment bank 22
─ International shipping backlog due to COVID-19 expected to lastwell into 2022. The Port of Yantian is responsible for 25% of U.S.bound shipments. Following a coronavirus outbreak in early June,the port has only been operating at 30% capacity. Surroundingports have also been backlogged as they have been taking onshipments from the Port of Yantian. Freight rates have beencontinuously increasing, causing businesses to increase the pricesof their products for consumers. In addition to increasing freightrates, businesses are also presented with inventory issues due tothe supply chain problems.
─ Asia-North Europe freight rates climbed to a new high of$11,068/FEU from $7,294 in early April, nearly 600% higherthan last year.
─ Europe-North America rates rose to $5,193/FEU from$2,456 in early April.
─ Asia-US East Coast rates increased to $9,803/FEU from$5,814 in early April - these rates are 250% higher thanrates were a year ago.
─ Transpacific Asia-US West Coast rates rose to $6,588/FEUfrom $5,156 in early April - this rate is 245% higher than thesame time last year.
─ Maersk, an industry shipping leader, is taking action todecarbonize shipping. As sustainability grows on the priority listof many customers, investors, and employees, Maersk hasannounced that they will no longer purchase vessels that do nothold zero-carbon capabilities. In an attempt to decrease thecarbon footprint of the shipping industry, Maersk is planning tohave a carbon-neutral vessel in the water in 2023. With theindustry leader shifting to carbon-neutral vessels, this might bean inflection point in the shipping and ship manufacturingindustries, which could ultimately accelerate the ongoing trendof reducing carbon emissions.
MaritimeTransport&Facilities
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
1-Jan 1-Feb 1-Mar 1-Apr 1-May 1-Jun
2020 2021
Q22021QUARTERLYM&AREPORT
The McLean GroupPremier middle market investment bank 24
Sources: S&P Capital IQ(A) = announcement date
TRANSACTIONSBYMONTHNotablePrecedentTransactions
MARITIMETRANSPORT&FACILITIES
In 2021 Q2, there was a 23.5% increase quarter-over-quarter (QoQ) inM&A activity resulting in 21 deals - the largest of which was theacquisition of Diamond S Shipping by International Seaways for $1.0Bwith an EBITDA multiple of 9.04x. Although this mega-merger was doneby two public companies, the vast majority of the 21 deals in Q2 werehandled by private companies.
The growing number of private transactions continues to illustrate thepower of private funding. Market consolidation is expected to continueas the increases in freight rates and shipping costs continue to damagesmall and medium business efforts.
acquired by
Date: 3/31/2021 (A)
EV: $1.1B
EBITDA Multiple: 9.04x
Subsector: Petro. Shipping
KeyStatistics
acquired by
KeyStatistics
acquired by
Date: 4/19/2021
EV: $82.0M
EBITDA Multiple: ND
Subsector: Marine Equipment
KeyStatistics
acquired by
KeyStatistics
acquired by
Date: 6/22/2021 (A)
EV: $322.4M
EBITDA Multiple: 117.55x
Subsector: Shipping Vessels
KeyStatistics
acquired by
KeyStatistics
Date: 6/01/2021 (A)
EV: $51.3M
EBITDA Multiple: ND
Subsector: Bulk Shipping
Date: 4/16/2021
EV: $100.0M
EBITDA Multiple: ND
Subsector: Logistics
Q3 2020
24
Q4 2020
38
Q1 202117
Q2 202121
Date: 5/3/2021
EV: $63.0M
EBITDA Multiple: ND
Subsector: Shipbuilding
74
1311
8
19
5 4
8
11
5 5
Jul-2
0
Aug-20
Sep-2
0
Oct-20
Nov-2
0
Dec-20
Jan-21
Feb-2
1
Mar-
21
Apr-21
May
-21
Jun-21
Q22021QUARTERLYM&AREPORT
The McLean GroupPremier middle market investment bank 25