Capstone Partners Reports: Buyers Target Lower-Level Bureaucracies Amid Stall in Government IT Market
Capstone Partners released its December 2025 Government IT Services Sector Update, reporting that merger and acquisition (M&A) deal volume in the Government IT market has stalled in year-to-date (YTD) 2025 amid pullbacks in federal government contracting opportunities. The majority of Department of Government Efficiency (DOGE)-led contract cancellations have targeted opportunities awarded to small business information technology (IT) service providers, significantly impacting the financial security of a key segment of the middle market and hampering current and future M&A activity. Acquirers have shifted attention toward unique defense- and public-safety-oriented software solutions, favoring valuable intellectual property (IP) and market differentiation over more generic diversified IT services.
State, local, and education (SLED) levels of government have largely remained isolated from the downsizing efforts of federal agencies, offering a bastion of continued end market demand within the Government IT market. System architecture modernization efforts across smaller government agencies have remained robust, supported by expanding state IT budgets. Acquirers have identified this market as a lucrative opportunity to maintain presence in an otherwise faltering market, paying increased attention toward targets whose revenue streams are heavily weighted toward these lower levels of bureaucracy.
Rising threats from nation-state-sponsored cyberattacks have established cybersecurity as a mission-critical component of U.S. homeland security strategy. Federal funding earmarked for cybersecurity has consistently expanded as a proportion of overall government IT spending over recent years, despite recent declines in nominal budget. Likewise, the Department of War (DOW) (formerly Department of Defense) has dedicated greater than or equal to 20% of the Department’s total IT budget toward cybersecurity over the past five budget cycles (2022-2026), according to GovWin IQ. Initiatives including U.S. Cyber Command (USCYBERCOM) 2.0 and debates surrounding the establishment of an independent Cyber Force offer significant runway for further cybersecurity budgetary expansion.
Government IT market deal volume has remained flat year-over-year (YOY), posting 81 transactions in YTD 2025. Strategics have maintained a majority presence in the sector, capturing additional market share from financial buyers to date, buoyed by public company activity amid a decline in private-led M&A. Private equity (PE) activity has fallen YOY as contract cancellations and market volatility have disturbed target valuations, evidenced by a two-turn fall in the average EV/Revenue multiple in 2024-YTD, compared to the prior two-year period. Platform investments have declined 50% YOY while add-on deals ticked up marginally by one deal, with PE firms displaying hesitancy to enter the Government IT market at such a volatile point.
Public companies in Capstone’s Government IT Services Index have largely underperformed wider IT and Public markets in the last twelve month (LTM) period due to uncertainty surrounding security of previously secure government contracting revenue streams. Leading public strategics including CACI (NYSE:CACI), Leidos (NYSE:LDOS), and Science Applications International Corporation (Nasdaq:SAIC) have historically generated greater than 85% of total annual revenues from U.S. government opportunities, according to company filings. Poor share performance and muted financial results from these market leaders have subdued inorganic growth strategies, further suppressing sector M&A activity.
Also included in this report:
Analysis of which segments and end markets are experiencing expansion and retraction in deal volume.
Identification of the IT business codes and business types most impacted by DOGE-led contract cancellations.
How new technologies such as virtual reality (VR), AI, and autonomous systems are attracting equity financing activity towards military software.
Capstone Partners’ Aerospace, Defense, Government & Security (ADGS) Investment Banking Team provides M&A, capital formation, and financial advisory services to the owners of middle market businesses in the Government IT Services Market. Our team partners with leading mid-to-large sized businesses that serve growing end-markets.
For more information on the Government IT Market trends featured in this report or to speak with one of our ADGS M&A Team members about how to grow, value, and/or sell your company, we are here to help. Contact us today.
