Home of the BIG deals

BAE North America is out in front of windfall acquisitions year<@VM>How many people does it take to complete an acquisition?<@VM>With BB&T deal, Windsor sees both sides now

"To reach our goals, we had to change how we did our M&As in North America." ? Lucy Reilly Fitch, senior vice president of acquisitions and strategy, BAE Systems North America Inc.

Rick Steele

"I'm not ready to ride out into the sunset and neither is this management team. ... We have a lot of fight left in us and a lot of insight into the marketplace." ? James McNeil, founder of McNeil Technologies Inc.

Ricke Steele

Russell Wright, chairman and chief executive officer of Dimensions International

Rick Steele

Donna Morea, president of CGI-AMS

Laurie DeWitt

"I'm a firm believer that organization structure follows strategy. You develop the strategy and then you create the organization to execute that strategy."? William Hoover, Dynamics Research Corp.

Olivier Douliery

After several years of active deal-making, BAE Systems North America Inc. in 2001 suddenly ran into market conditions that hobbled its mergers and acquisitions strategy.

Contractor valuations rose dramatically, and top-quality, large defense companies for sale were nearly impossible to find. The $5 billion-a-year company wasn't able to meet its objective of growing by 15 percent annually through acquisitions.

"We realized we had to become more aggressive," said Lucy Reilly Fitch, senior vice president of acquisitions and strategy for the American subsidiary of the U.K. defense and aerospace giant. "To reach our goals, we had to change how we did our M&As in North America."

In 2003, BAE reorganized how it evaluated targets, with sector presidents and Fitch's corporate office in Rockville, Md., working more closely together. They also clarified their definition of a strategic acquisition. The company wasn't looking only for defense companies but also for companies that served national security interests, including homeland defense.

"We broadened our aperture," Fitch said.

The result was a deal that wowed an industry.

BAE's October acquisition of DigitalNet Holdings Inc. for $593.2 million was picked by a panel of industry experts as the Big Impact deal of 2004 because it showed that the company could make a big acquisition in its bid to take on other contractors such as Lockheed Martin Corp. and Northrop Grumman Corp. Over the last year, BAE made four government-related acquisitions, strengthening its position among elite systems integrators.

But BAE wasn't the only deal-maker creating an impression. In 2004, 106 acquisitions occurred among government IT services companies, according to research by Washington Technology and investment banking firm Houlihan Lokey Howard & Zukin of McLean, Va.

The number of deals is more than 25 percent higher than 2003's total of 82, and represents a steady climb from just 45 transactions in 2001. The companies making the deals show a wide range of interests in the government market, particularly because of budget growth in homeland security, intelligence, network-centric warfare and outsourcing. Companies making acquisitions are often are trying to get into these markets or, if they're already in, trying to grow to increase their competitiveness.

Contributing to the rising number of transactions are capital equity groups such as Veritas Capital Fund LP, which made its first foray into the government IT services market in 2004 when it acquired McNeil Technologies Inc. These groups are looking to repeat the success of equity-backed ventures such as Anteon International Corp. and SI International Inc., which now are publicly traded and continue to make acquisitions of their own.

Another factor driving M&A growth is the push by foreign companies into this market. In addition to BAE, six other non-U.S. companies bought American firms.

"We wanted to get to a proper scale and get bigger customers, and the biggest customer is right next door," said Claude Séguin, senior vice president of strategic investments of Montreal-based CGI Group Inc. CGI and CACI International Inc. split American Management Systems Inc.'s government business in a complex deal worth $848 million. That deal was tapped as a close second to the BAE-DigitalNet transaction by the panel of industry experts.

One of the strongest trends ? and the one that bodes well for the future of the government market ? is the vitality of deal-making among small businesses. For example, Dimensions International Inc. nearly doubled its size with its first acquisition when it bought Sentel Corp. in June. The transaction pushed its revenue from $53 million to $100 million, a big first bite.

[IMGCAP(3)]"It's eat or be eaten, and we decided we weren't ready to be bought," said Russell Wright, chairman and chief executive officer of Dimensions International of Alexandria, Va., which specializes in information integration, logistics management and air space management support.

But the deal almost didn't happen, even though Sentel was one of the first companies Wright looked at when he began shopping for an acquisition.

"I looked the other way," he said. "Taking on that size acquisition right out of the gate was more aggressive than I wanted to be."

But three months later and after looking at three other targets, Wright agreed to a lunch to discuss Sentel. "Once I met the owner of Sentel [James Garrett] and got an idea of Sentel's culture, I knew we were an ideal fit and it was worth the risk," he said.

The next deal likely will be easier. "At least the bank knows I can pull the trigger," Wright said.



CULTURE COUNTS

A cultural fit also was a driver behind the year's most unusual deal, AMS' joint acquisition by CACI of Arlington, Va., and the CGI Group of Montreal. CACI bought AMS' defense and intelligence business, while CGI acquired the federal civilian, state and local and commercial units.

Donna Morea, president of CGI-AMS and a longtime AMS employee, said that as she learned about CGI during the acquisition, "it was like holding up a mirror" to AMS. Like AMS for most of its 30-year history, CGI is run by its founders, who emphasize customer satisfaction as the measure of success.

"I felt like we were coming home again," she said.

[IMGCAP(4)]Becoming a part of CGI brought AMS the ability to go after larger contracts that require a breadth of capabilities, something AMS struggled to do previously, even though it had about $1 billion in revenue. An early sign of the deal's success came when CGI-AMS in November was named one of 12 winners of the Justice Department's $980 million Information Technology Support Services contract, Morea said.

Although the company will have to compete for work, it is one of the few companies on the task order contract that is approved for all service offerings, such as infrastructure management, application management, outsourcing, system integration and business process outsourcing.

"We would not have qualified across all of those dimensions if not for CGI," Morea said.

One big cultural difference between CGI and AMS is the making of acquisitions. The CGI Group has completed 60 since its founding in 1976; AMS completed precious few in its more than 30 years in existence. But that is going to change, according to Morea and Séguin.

"We're not shooting from the hip," Séguin said, "but we are looking to reinforce our base in the United States."

A big target is adding capabilities to pursue more outsourcing work, Séguin said.

CGI-AMS' federal business is between $200 million and $250 million, Morea said. "To be a player, you have to be at least twice that," she said.

The goal is to have $500 million in federal revenue by the end of 2006. "That's a big, audacious goal," she said.
 



A BUYER AND A SELLER

McNeil Technologies was on both sides of deals last year. In one of the first deals of the year, it acquired Research and Evaluation Associates Inc., a company with about $7.5 million in annual revenue. About seven months later, in July, McNeil pulled off a surprise when it was acquired by Veritas Capital.

Although the value of the deal was not disclosed, Veritas now has a platform company with revenue that was about $75 million in 2004 and is projected to hit $100 million in 2005, not counting any potential acquisitions.

[IMGCAP(2)]For James McNeil, who founded the Springfield, Va., company in 1985, the sale to Veritas will let the company grow and make acquisitions while remaining independent.

"We had financed our growth in-house, and we were tapping out our resources," he said. "When you are growing 40 percent to 50 percent a year, it gets a little tough."

Though McNeil had been fielding eight to 10 calls a week from potential suitors -- and had even higher offers -- McNeil said he went with Veritas because it let him and his management team stay in place, and it gives them the resources to continue making deals.

Other deals would have eliminated the name of McNeil and integrated it into a larger company. "I'm not ready to ride out into the sunset, and neither is this management team," McNeil said. "We have a lot of fight left in us and a lot of insight into the marketplace."

With Veritas' backing, McNeil plans to look at companies with intelligence, IT and consulting expertise to complement the work McNeil Technologies does. His targets are in the $50 million to $100 million range. He said he wants to close two deals in 2005.

Since the McNeil purchase, Veritas showed its commitment to the government services field with its planned purchase of DynCorp International LLC from Computer Sciences Corp. for $850 million. The deal, announced in December, is pending.

Although rumor has it that Veritas will combine DynCorp with McNeil Technologies, McNeil said he has not talked to Veritas about that prospect and doesn't expect it to happen.

"We'll work together, I'm sure, but our core businesses are different," he said.

 

A RESELLER'S TRANSFORMATION

After adopting its third name in six years, Apptis Inc. of Chantilly, Va., is making bold moves to remake itself from a reseller of IT products into a services company.

The company, which started as Intellisys Technology Corp. before becoming PlanetGov in 2000 and Apptis last year, made three deals in 2004 and closed a fourth deal at the start of 2005.

The company always had a strong professional services unit, but it has been overshadowed by the revenue generated by the reseller business, said Brian Nightingale, senior vice president of business management. Nightingale, Apptis CEO Stephen Baldwin and three other Apptis executives bolted from BTG Inc. and acquired Intellisys after BTG sold its reseller business to rival GTSI Corp.

Apptis kicked off its buying spree in November 2003 after New Mountain Capital took an equity stake in Apptis and agreed to back acquisitions. The company is using acquisitions to acquire personnel who have desirable skill sets, such as network and software engineers as well as customers, Nightingale said. For example, at the end of 2003, Apptis acquired General Data Systems, which gave it access to more State Department customers. Acquiring Technology and Management Associates brought Federal Aviation Administration customers.

Apptis made three deals in 2004, and in January completed its purchase of SETA Corp., a McLean, Va., IT services company. Apptis is projecting about $600 million in annual revenue, Nightingale said.

"Our acquisitions over the last 18 months have been to position ourselves as a premier IT services provider," he said.

Although 75 percent of the company's revenue is from product sales, about 75 percent of Apptis' profits are from professional services. "From a bottom-line standpoint, services heavily rule the day," he said.

 

NO PRESSURE

Before it paid $53.4 million in September for Impact Innovations Group LLC, Dynamics Research Corp. of Andover, Mass., had not done a deal since 2002.

[IMGCAP(5)]The deal was aided by a company reorganization earlier in 2004 that defined six solution sets that DRC offers its customers, said William Hoover, company president and chief operating officer.

"I'm a firm believer that an organization's structure follows strategy. You develop the strategy, and then you create the organization to execute that strategy," he said.

With the reorganization, DRC quickly spotted where Impact Innovations Group would fit into the company. "Because we had reorganized, it was not a very complex task to assimilate IIG into the organization," Hoover said.

About half of DRC's revenue comes from acquisition management support, and the rest come from business transformation, business intelligence, case management, infrastructure support and training. IIG brought capabilities in infrastructure support and business intelligence, Hoover said.

DRC also added a new executive, Ellen Glover, to its team through the acquisition. When it reorganized, DRC created a new division -- systems development -- that is the company's largest with between $130 million and $150 million in annual revenue. DRC was searching for a leader for the unit when it began the due diligence process for the IIG acquisition, Hoover said.

Glover, who was the president of IIG's government unit, now leads the systems development division. "It was obvious that Ellen was the ideal candidate," Hoover said.

As for more deals, Hoover said the company will stick to its strategy and not make acquisitions to fuel growth. There is no set goal for growth through acquisitions.

"We are not going to be pressured to make a deal that doesn't make sense for us," he said.

Senior Editor Nick Wakeman can be reached at nwakeman@postnewsweektech.com.
Bringing a deal from conception to completion takes more than a willing buyer and seller. Here are all the other people standing around the table at the end of an acquisition.

THE INVESTMENT BANKERS

On the seller's behalf, bankers get the house in order. They develop the statement that will catch the eye of a potential buyer.

The investment bankers must know the selling company and be ready to answer questions about finances, operations and other issues. They line up buyers and help separate the serious shoppers from the casual browsers.

As negotiations start, they manage meetings and help write a letter of intent when the field of suitors has been winnowed to one. They are part of the subsequent due diligence process and the crafting, with the lawyers, of a purchase or sale agreement. They also help with integration planning.

Working for the buyers, bankers usually are part of a team that has looked closely at the company to identify any gaps that need to be filled and how to fill them. They conduct market research and identify and approach targets. After negotiations start, their actions mirror those of the banker on the sell side. 

THE ACCOUNTANTS

Their role is to audit a company's financials and provide a valuation analysis of the company being acquired. Accountants play an extremely important role in designing the structure of an acquisition, because different structures have different tax implications. These implications can make or break a deal.

THE LAWYERS

The lawyers draft many of the documents that finalize an acquisition, and these documents are filled with a detailed, arcane language specific to mergers and acquisitions.

As negotiations progress, often the lawyer takes the lead. Buyers and sellers should have lawyers who specialize in mergers and acquisitions. A corporate generalist should not be doing the deal.

THE COMMERCIAL BANKERS

For buyers who must borrow money to make deals, commercial bankers are critical.

Commercial bankers need to be brought on board early in the process -- even before a target is picked ? so they they can assure themselves that a buyer is financially sound to go out and make deals.

As a specific deal nears, the bank likely will want to take its own look, and may even conduct its own due diligence.

On the sell side, the commercial bank will want to know if one of its customers is being sold, because any outstanding debts will need to be paid off or properly assumed by the buyer.
The next time investment banker Richard Knop has a client who's getting cold feet about selling his company, who's worried about the fate of his employees or what his customers will think, Knop will know exactly how that client feels.

On Jan. 5, after leading Windsor Group LLC, his own investment banking firm, for 12 years and being a part of scores of other people's transactions, Knop sold his company to BB&T Capital Markets of Richmond, Va.

"I really know what a seller goes through now," he said. "I had to think long and hard about it."

Counseling one client since the sale of Windsor Group, Knop told her, "I know this is your baby, just like Windsor was my baby."

For sellers, worries often have little to do with money but include intangibles such as their legacy, the reaction of their industry and how employees and customers will be treated.

"It is hard to find a buyer that matches up with all that," Knop said. But Knop said he has no regrets. Before the sale, Windsor of Reston, Va., had lost assignments because clients were looking for more than merger-and-acquisition advice. Joining with BB&T, the ninth largest bank in the United States with more than $100 billion in assets, will let Windsor expand its services, including the ability to take clients into the public markets.

"We'll be a full-service firm now," he said.

And Windsor, which has closed 12 deals in the last 12 months, gives BB&T a much stronger foothold in the government IT arena. BB&T closed three of its own deals in 2004.

The structure of the sale also lets Windsor remain intact, another plus for Knop. He is staying on as senior managing director. Windsor's co-owner, John Allen, remains as co-managing director.

And many of the Windsor staff who helped build the company were rewarded with retention packages as part of the deal, Knop said.

All 17 investment bankers that were with Windsor remain on board, and three bankers BB&T had working on government deals will move into Windsor's Reston offices. John Hagan, who led the BB&T group, is co-managing director with Allen.

The sale also reflects Knop's and BB&T's faith in the future of the government market, Knop said. In the coming years, more government IT services companies are going to need access to public markets for making initial stock offerings, secondary offerings and financing public debt. Both Windsor and BB&T want to capture some of this business, and together they can, Knop said.

"We think there are going to be a number of public deals this year," he said.

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