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What’s Fueling the M&A Wave in Government Technology?

As local and state officials get more sophisticated about software, companies are buying peers and competitors in a push unlike any yet seen. Experts explain what’s happening and what it means for governments.

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Gov tech providers keep expanding and getting bigger, and that could lead to more one-stop shopping for local and state officials charged with buying and deploying the latest software and related technology.

That’s one takeaway from an ongoing wave of mergers and acquisitions in the government technology space.

“Everything is at a high water mark right now,” said Jeff Cook, managing director at Shea & Co., an investment bank that has advised for more than 20 gov tech deals over the past five years. “What’s going on here is unprecedented.”

According to the latest data from Cook, Q2 transaction activity in the space hit $4.5 billion, up from $3 billion in Q1. The rise in activity reflects a broader increase in tech activity as pretty much every aspect of daily life continues to become more digital.

“That dynamic has absolutely trickled down to the government sector,” Cook said.

BIGGEST DEALS


A quick look at the landscape so far this year helps to illustrate the stakes involved and how things are changing.

One of the biggest deals — perhaps the biggest gov tech deal to date — was announced in February when Tyler Technologies said it would spend $2.3 billion to buy NIC.

Texas-based Tyler Technologies focuses on local government, including such areas as courts and finance. Kansas-based NIC, now a wholly owned subsidiary of Tyler, offers digital and payment services largely to states. The deal highlights how various services and technology offerings are increasingly being offered under one roof, though with this specific transaction, there appears relatively little overlap.

Tyler, for its part, has been on a buying spree of late. It recently said it would spend $84 million to acquire VendEngine, for example. Its technology helps correctional officials operate commissaries, video visitation and other services. Tyler also is absorbing veterans’ services provider DataSpec and school software vendor ReadySub.

Other deals from this year include the acquisition of public meeting technology provider PrimeGov by citizen engagement firm Rock Solid Technology — a reflection of how the pandemic has sparked more use of virtual meetings — and EMS software and data firm ESO’s purchase of Emergency Reporting, which sells cloud-based record management software for first responders. That deal shows how public safety technology has become more attractive as law enforcement, fire and emergency medical agencies strive to provide faster responses.

In all, a Government Technology count of mergers and acquisitions in this space found 19 deals so far in 2021.

Those deals involve various companies providing a variety of services.

Just a few years ago, said Cook, citizen engagement and digital services commanded most of the focus when it came to mergers and acquisitions. But now the activity covers the larger world of government technology, especially tech anchored around cloud and subscription software.

“I don’t see any slowdown, at least for the rest of the year,” he said.

DRIVING FORCES


It’s not only the realities of the pandemic that is driving this activity, according to Stewart Lynn, partner at Serent Capital who leads its government technology practice.

“There’s a realization in the investor community that the government sector is relatively resilient if we go through a recession,” he said. “Government generally has the ability to pay its bills.”

Not only that, but government technology has relatively high rates of retention and what experts call “stickiness,” meaning their products tend to find regular use and undergo less churn than in other sectors. As well, the increasing likelihood of a big federal government infrastructure package is working to brighten the outlook for this part of the economy.

Downsides, of course, exist.

Some gov tech can be relatively antiquated, for instance, and that can present challenges when trying to combine forces after a merger and acquisition, Lynn said. That could, in turn, present problems on the customer end of things, assuming the path toward corporate unification proves bumpy. Additionally, over the long haul, the possibility exists that mergers and acquisition could end up dampening innovation.

MORE EXPERTISE


For now, though, the story remains one of growth and innovation, with startups continuing to enter the scene and governments both large and small getting smarter about their purchases and deployments of technology, experts said. And tech experts are moving with more frequency between software companies and governments.

“That is increasing learning and energy and sophistication” when it comes to technology decisions in government, Lynn said.

As for local and state governments, they can expect more tech integrations thanks to this ongoing wave of mergers and acquisitions, said Steve Ressler, a serial gov tech entrepreneur who is also president of Callyo, which sells mobile services for law enforcement and was acquired last year by Motorola Solutions.

That could mean, for instance, one customer support or account management contact for multiple systems, plus more efficient and perhaps less costly access to various software tools.

“There is still ongoing training needed for digital procurement,” he said, though he added that such programs are happening at the federal level and now influencing similar moves among state and local government officials.

Those trends promise to continue as more mergers and acquisitions take place.

“We are still in the early innings,” Lynn said.
Thad Rueter writes about the business of government technology. He covered local and state governments for newspapers in the Chicago area and Florida, as well as e-commerce, digital payments and related topics for various publications. He lives in New Orleans.
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