Market Watch: Top 100 list reveals growth strategies

Jerry Grossman

Washington Technology's 2005 list of the Top 100 federal IT prime contractors is populated with familiar names, some perennial leaders and others making the ranking for the first time.

All of these businesses deliver non-IT services and products to federal markets. Most derive revenue from federal customers through subcontract arrangements, in addition to their prime contracting positions. Revenue from non-IT business and subcontracts is not included in the Top 100 analysis in these numbers. Notwithstanding these factors, the data provides insight into the federal IT segments.

Acquisitions contributed significantly to IT revenue growth in fiscal 2004. The top 10 reflects stability. Public companies, comprising 60 of the top 100, captured the lion's share of the business.

Eighty-five companies were top 100 qualifiers on the 2004 and 2005 rankings, which measure IT prime contracting revenue in fiscal 2003 and fiscal 2004, respectively. Thirty-nine of these "repeat qualifiers," 46 percent, are in the top 50 companies on the list.

In the aggregate, prime federal IT revenue for the repeat qualifiers grew by about $7.5 billion in 2004, approximately 16 percent more than the $46.5 billion level in 2003. Of these 85 companies, 30 are active acquirers, together announcing 80 acquisitions of federal IT companies in 2003 and 2004.

As closings for these transactions occurred at various times during each of these years, the precise revenue contributions for each year cannot be clarified fully. Still, with the information available, I estimate that about $3 billion to $3.5 billion of the IT revenue growth achieved by the repeat qualifiers, or slightly less than half, was derived from acquisition. The remainder of the IT revenue growth was produced organically.

These results suggest that, in the aggregate, the repeat qualifiers achieved roughly 8 percent organic growth in their federal IT revenues in 2004.

Nine of the top 10 companies in 2003 remained in the top 10 in 2004. The exception, Titan Corp, dropped to No. 12 while Dell Inc. moved up to No. 8. Dell's 2004 prime IT revenue more than doubled to slightly more than $2 billion.

This year, the top 15 contractors produced $35 billion in prime IT revenue vs. $33 billion in 2003, an increase of about 7 percent. The remaining 70 repeat qualifiers achieved aggregate federal IT revenue of nearly $19 billion in 2004, representing a growth rate of more than 40 percent from their 2003 level.

While the dominant federal IT primes continue to capture a significant portion of the pie, the companies with much smaller shares of these prime IT contracts are growing this segment several times faster.

Publicly traded companies dominate the listing when measured by aggregate federal IT prime revenue. These 61 public companies capture about 80 percent of the prime IT revenue in 2004. These companies are, with a few exceptions, much larger than their privately owned competitors.

However, the private companies were acquirers in only 10 percent of the transactions, suggesting that they achieved a higher rate of organic growth in prime IT revenue than the public companies.

Although some new public companies made the 2005 Top 100 list, most of the new names are private companies, indicating that growth in rank can occur organically for smaller, well-managed companies.

Finally, while the repeat qualifiers reached 16 percent growth in federal IT revenue, the variation in results at the company level was very large. Individual company IT revenue performance ranged from a decline of nearly 50 percent to an increase of more than 200 percent.

As usual, the aggregate picture may appear relatively calm, but underneath the surface, there is much greater variability in results.

Jerry Grossman is managing director at Houlihan Lokey Howard & Zukin in McLean, Va. He can be reached at jgrossman@hlhz.com.

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