Pure-play and services firms stick to knitting

Jerry Grossman

The Washington Technology
Top 100 list of federal government
services companies contains familiar
names, reflecting a wide range of
company size, type and business
concentration.

The list, published May 14,
includes companies that are public
and privately held, foreign and
domestic, product-oriented and service-
oriented, as well as commercial
market-focused and federal contracting-
oriented.

The list reinforces some interesting
trends and shows the degree to which
their businesses depend on the sale of
information technology services.

The aerospace-defense prime contractors
continue to expand their
government services segments.
Publicly traded companies dominate
the list in terms of revenue dollars
captured. The most active acquirers
during the past three years are all on
this list, including both public and
privately held businesses.

Most industry executives and
investors will gain fresh insight from
this list because it reflects many of the
industry trends at work.

The dominance of the major prime
contractors is readily apparent.
These lead system integrators ?
Lockheed Martin Corp., Boeing Co.,
Northrop Grumman Corp., General
Dynamics Corp. and Raytheon Co. ?
hold five of the top seven positions
on the list. Together, these five companies
generated more than $35 billion
in services revenue, about 37
percent of the total for all 100 companies.
These five companies produced
nearly $175 billion in total
2006 revenue. So although their federal
IT businesses are large relative
to other contractors, IT services segments
represent only 20 percent of
their total revenue.

Nine of the top 20 are diversified
companies, deriving the majority of
their revenue from nonfederal customers
? including Fluor Corp.,
EDS Corp., Computer Sciences
Corp., Dell Inc., IBM Corp. and
Verizon Communications Inc.
Together, these public companies
delivered nearly $20 billion of services
work to federal customers,
about 21 percent of aggregate Top
100 revenues. For these nine, however,
federal services represent less
than 6 percent of their $350 billion
in total 2006 sales. Together, the
major prime contractors along with
the large diversified companies, a
total of 14 companies, realized about
$55 billion in 2006 federal services
revenue. Although their revenue,
collectively, was nearly 60 percent of
the Top 100 total, it was only 11 percent
of their aggregate corporate
revenue. The financial performance
and market valuations of these companies
are largely driven by nonfederal
products and services.

The 10 pure-play federal companies
on the list include Science Applications
International Corp., CACI
International Inc., ManTech
International Corp., SRA International
Inc. and SI International Inc. Their
qualifying 2006 revenues of about $8
billion were one-half of their total revenues.
For them, revenues and profits
derived from federal services are significant
contributors to their operating
performance and market valuations.

Six Top 100 companies with foreign
ownership elements made the list,
such as BAE Systems Inc., QinetiQ
Group plc, Serco Inc. and Thales
Group. Their aggregate 2006 Top 100
revenues were $2.7 billion, less than
2 percent of their total revenues.

Total federal services revenues in
2006 were about $95 billion. The five
large, domestic prime contractors
captured 37 percent of this market.
Public pure-play and private government
services contractors captured
about 21 percent. The remaining 41
diversified public companies accounted
for about 39 percent of the market.

The $95 billion of 2006 federal
services revenue is less than 8 percent
of total 2006 revenues for the
Top 100 companies. For many of the
public companies, the federal market
is a small component of their overall
business. However, for the public
pure-play companies and private
government services companies, federal
work is a core competency and a
critical element in their organic
growth plan and acquisition strategy
going forward.

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

About the Author

Jerry Grossman is managing director at Houlihan Lokey Howard and Zukin.

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