Peter Chadwick of Berkeley Research Group noted: “Sequestration will continue to be a part of our lives—a forced contraction of government spending.” Government contractors “will fight for a smaller and smaller pie. There is a reduction in the purchases of a variety of products, but also in the outlays to the contractors.”

Added BRGCapstone’s Haywood Miller, “Fifteen or 20 years ago, government contractors were not interesting to banks or private equity. Then, suddenly, there was an outsourcing boom, the various Iraq wars came, and there was an absolute explosion of government contractors. Private equity and banks got involved.” But, he noted: “A lot of these companies are relatively low-margin operations. We see more of them dressing themselves up as tech plays, but they are often body shops that are putting bodies in seats. There is a squealing in D.C. that is pretty substantial.” At the end of the day, Miller continued, “The small businesses are going to get their piece of the pie. The mid-tier companies are getting squeezed. The big companies want to maintain their top line.”

Just look at the space where it’s often easiest for the government to reduce purchases, added Chadwick, “like IT groups, body shops and telecommunications. In some cases, they disappear overnight. Their capital is human. They are like a school of fish, and all of their employees leave and follow the contract over to another provider. They typically are not acquired. There is relatively little M&A in that space. The big companies come in and take the contracts.”