ACS Is Craving a Fifth Acquisition

By Nick Wakeman, Staff WriterAdvanced Communication Systems Inc. has had a voracious appetite for acquisitions in the past year. But even though it has swallowed four companies in 12 months, that appetite is far from sated.Officials with the Fairfax, Va., communication engineering company said they are evaluating about 20 companies as possible targets for acquisition. The company's buying spree began when it went public in June 1997 and raised $22 million. A secondary offering in May raised another $23 million."When we went on our road show last year, we said we were going to do acquisitions, but I don't think anyone expected us to do four in one year," said Dev Ganesan, ACS' chief financial officer.The acquisitions have helped boost company revenue from $52 million in 1997 to about $107 million in 1998. But once the four acquisitions have been under ACS' belt for a full year, the company should surpass easily the $200 million mark, Ganesan said. "That's our run rate right now."The company has made its reputation by providing a variety of satellite-based communication services to the federal government, including software development, design work, systems integration, installations and maintenance, said George Robinson, ACS president and chief executive.The company's mix of business is about 55 percent work for the Navy and the Defense Department, 30 percent civilian government and 15 percent commercial and international.Ganesan and Robinson would not say how many acquisitions they expect to close in the next year, but more are coming. Robinson said he wants to build a $500 million a year company by 2003. He is targeting internal growth at about 25 percent annually and another 10 percent annual growth through acquisitions.ACS kicked off its acquisition spree with the purchase of RF Microsystems Inc. of San Diego for $5 million in September 1997. RF Microsystems brought about $7 million in annual revenue from technical and engineering services for the Department of Defense. A month later ACS bought Integrated Systems Control Inc. of Virginia Beach, Va., for about $5 million. Integrated Systems provides communication and IT services mostly to the Navy and had about $12.5 million in annual sales.In February, ACS acquired Advanced Management Inc. of McLean, Va., for $19.5 million. Advanced Management provides IT services and brought in civilian customers such as the U.S. Customs Service, General Accounting Office and the Transportation Department.In its most recent acquisition, ACS bought Semcor Inc. of Mount Laurel, N.J., in June for $41 million. Semcor brought with it $90 million a year in revenue from providing aviation, communication and IT services to customers such as the Army, Navy, Department of Defense and Federal Aviation Administration. Semcor also brought a close alliance with Microsoft Corp.Robinson said he took his company public and embarked on the acquisition strategy to take advantage of consolidation that is reshaping the industry.At one time there was plenty of room for smaller players because the Department of Defense was building stovepipe systems, he said. "You used to have different communication networks to provide communication capabilities to different kinds of users," he said. "Now there is more of a systems approach. You've got to have a broader perspective when engineering and designing a system's architecture than in the old days."The move to a systems approach coincided with procurement reform and the government's desire to deal with fewer contractors, which also is fueling consolidation, Robinson said. "If you are a larger company, you can do more and reduce the government's costs," he said."What you are seeing is the government bundling a lot of programs," said Mark Jordan, an analyst with the equity research firm A.G. Edwards & Sons Inc. of St. Louis. Bundling creates larger contracts, which favor larger companies, he said.The satellite-based communication industry is very fragmented, Jordan said. "You have a lot of smaller companies, so it is a very ripe place for consolidation," he said.While Jordan sees ACS as a strong player in consolidation, he also notes its "internal growth rate has been very impressive." Over the last five years, the company has grown at an annual rate of 43 percent.Along with its internal growth, the company has higher than average profit margins, according to Rohan Myrie, an associate equity analyst at Legg Mason Inc. in Baltimore. The company's margins are about 8 percent compared to the 6.5 percent average for the other federal IT companies Legg Mason follows, Myrie said.While the company's stock has dropped from its high April 13 of $14.94 a share to $9.25 Oct. 28, the "weakness is not due to fundamentals" but to underlying concerns with the economy, Myrie said.