AverStar's Growth Plan Targets Deals, IPO

By Nick Wakeman, Staff WriterAs more agencies turn to validation and verification of their computer systems as a way to avoid problems and save money, companies like AverStar Inc. of Burlington, Mass., are poised to grow their client base and business.AverStar, a privately held company, was created in February when executives of Intermetrics Inc. of Burlington and Pacer Infotec Inc. of Billerica, Mass., merged the two companies to strengthen their market position. About 85 percent of the company's business is with the federal government. As a bigger company, AverStar will build on its traditional business base with NASA and the Defense Department, said Michael Alexander, AverStar's chairman and chief executive. Plans also call for the company to make a handful of acquisitions over the next five years, company officials said. One such deal is nearly complete, company officials said, but will not be announced until later this year. AverStar officials said a letter of intent already has been signed, but they declined to identify the company. "We are looking at companies in the $30 million to $60 million range in revenue," Alexander said. All of them are in the government services market and will either add new information technology capabilities or bring in new customers. The goal is to grow from $115 million in 1997 to more than $500 million by 2003, and to prepare for a possible run at the public market, said Alexander. AverStar is on track to grow 15 percent to 20 percent in 1998, and the lion's share of the company's business mix will continue to be on the federal side, he said.While the company is a subcontractor on two recent high-profile wins, AverStar primarily works as a prime contractor, company officials said. "We are doing a lot of business on our [General Services Administration] schedule," said Bruce Burton, AverStar's executive vice president.AverStar is on a team led by Science Applications International Corp., which won a five-year, $400 million contract from the Immigration and Naturalization Service in June to oversee development of the agency's information systems. It's also on the Lockheed Martin Corp. team that won the $3 billion, 10-year NASA Consolidated Space Operations Contract in September.Pressure on the government to do more with less is fueling the demand for the validation and verification services that AverStar provides, Alexander said. "There have been government layoffs, but the missions are staying the same," he said. "The result is that the government is more system dependent."If these systems fail or do not function properly, an agency cannot complete its job, Alexander said. As a result, more agencies require the skills AverStar has developed through years of validating the software and systems used by NASA and the Department of Defense in space missions and weapons systems, he said.AverStar's job is to monitor and evaluate the systems and software that agencies install and ensure the systems perform properly, he said.The space that Intermetrics and Pacer were playing in, however, became more popular when larger companies looked for opportunities to counter weapon systems program reductions. Such companies often sell through the General Services Administration schedule and large, indefinite-delivery, indefinite-quantity contracts, he said. AverStar has found itself going up against TRW Inc. of Cleveland, Battelle Institute of Columbus, Ohio, and Science Applications International Corp. of San Diego, Alexander said.With a background of working with both NASA and the Department of Defense, AverStar has good credentials in the validation and verification area, said Michael Barnes, a senior analyst with the research firm Hurwitz Group of London. Few companies have that capability as their primary offering, he said."They have always been focused on where the need is the greatest, where the cost of failure has been the most pronounced," Barnes said.More government and commercial entities are using validation and verification of systems, in part because the technology is becoming more automated and less expensive, he said. In the past, validation and verification testing tended to occur at the end of a project, but today more testing is done throughout the development cycle. "And it is always more cost-effective to do the testing during development," he said.In addition to the Department of Defense and NASA, AverStar is working with the U.S. Postal Service, Health Care Financing Administration, the Securities and Exchange Commission and the Education Department, Burton said."One thing that has helped our business is the emergence of the chief information officer [at government agencies]," Burton said. The CIO is a single point of responsibility for making sure an agency's systems work, and "we have a lot of experience building, testing and verifying very complex systems," he said.NASA is looking to take the work it has done with AverStar and sell it to other agencies, said Lou Blazy, chief of software technology in the information systems directorate for NASA Ames Research Center. Blazy is based in Fairmont, W.Va.Blazy's office is responsible for the validation and verification of the software used in the international space station, space shuttle and next-generation space shuttle. AverStar holds the $80 million, five-year contract that Intermetrics won with NASA in November 1996, Blazy said.Blazy said he wants to use that contract to market Ames' validation and verification services to other NASA centers and to other government agencies, such as the Federal Aviation Administration and the Air Force. "Within the next year, we hope to open some cross-servicing agreements with other agencies," he said.Officials from the Immigration and Naturalization Service have visited Blazy's office to look for best practices in order to develop a validation and verification office, he said.