Boeing Information Services Sale Has Industry Abuzz

By Nick WakemanTop contenders to snap up Boeing Information Services include government contractors such as General Dynamics Corp., Litton-PRC Inc., Northrop Grumman Corp. and TRW Inc., along with a host of well-heeled investor groups, sources said this week.All of these high-profile federal contractors have been on a buying spree during the past two years, as they have sought to bolster their bulging information technology services businesses. Northrop Grumman's buy of International Research Institute Inc., Reston, Va., in September for $55 million is the latest deal inked by a member of this group. The bulk of International Research's business is defense-related software and applications development work.Then there are the investor groups with pockets deep enough that they could buy the Vienna,Va.-based Boeing unit to create an independent company, or join it to an existing company as part of a roll-up strategy, sources said. They are:Boeing, which is working with the Chicago branch of NationsBanc-Montgomery Securities, sent out confidential financial information to several companies in mid-December, sources said. NationsBanc's Michael Levy, who is reportedly handling the deal, told Washington Technology his firm does not comment on its clients. Boeing spokeswoman Andrea McCarthy, who declined to comment on the sale of the information services unit, said her company does not break out revenue for its information services unit. Sources estimated the business is worth $250 million to $300 million. It specializes in systems integration, logistics, networking, outsourcing and professional IT services and is part of the company's Information and Communication Systems division.Boeing Information Services also handles much of the aerospace giant's internal IT work, but that business apparently will not go with the sale, which may turn off some potential buyers, sources said. Computer Sciences Corp. was interested but backed away when it learned Boeing was not including its internal IT business with the sale, a source said.Boeing Information Services, which has an especially strong foothold in the Department of Defense, is relatively puny compared to the rest of the Seattle-based company, which had $45.8 billion in sales in 1997 and $39 billion in the first three quarters of 1998. Fourth-quarter figures have not been released.But the information services unit is large enough to attract plenty of attention, said Jon Kutler, president of Quarterdeck Investment Partners Inc., a Los Angeles firm that specializes in brokering IT deals. Boeing's size and the unit's customer base will make it an attractive property, Kutler said. "People are willing to pay more for more revenue," he said. The information services unit's stable of contracts include a five-year Defense Information Systems Network contract with the Defense Information Systems Agency and a healthy shot at dollars from NASA's lucrative Outsourcing Desktop Initiative. Boeing is one of seven winners of that contract, awarded in June and valued at $13 billion over nine years.But the big fish is the Army's Reserve Component Automation System, a 12-year contract worth $1.6 billion that the company won in 1991. Boeing's McCarthy said that contract is the unit's biggest moneymaker.Most industry observers expect a deal to be announced by April, but agreed that the information services unit will not fetch anywhere near the high multiple that the sale of BDM International brought when it was purchased by TRW in December 1997. TRW paid about $1 billion to buy $1 billion in annual revenue.None of the companies considered candidates for a possible deal would comment on the sale."We don't comment on rumors and speculation," said Norine Lyons, staff vice president for public affairs for General Dynamics of Falls Church, Va."We do not comment on possible acquisitions," said Marynoele Benson, a TRW spokeswoman.But Boeing's move to sell its IT services unit makes sense to many analysts and industry officials, who said Boeing must focus on its core businesses of defense and aerospace. The company has run into trouble since its acquisitions of McDonnell Douglas Corp. in August 1997 and the defense and aerospace units of Rockwell International Corp. in December 1996. Problems with ramping up Boeing's aircraft manufacturing may have helped push the company to decide to sell off the IT unit, several analysts said. IT problems also played a role in those manufacturing problems, according to Paul Nisbet, an analyst with the investment firm JSA Research of Newport, R.I. "Their systems weren't delivering information accurately and quickly enough to avoid problems," Nisbet said.Leading contenders like General Dynamics, Litton-PRC, Northrop Grumman and TRW all have made building their IT services unit a key to their growth strategies as they move away from their traditional defense base."We're not building as many ships, planes and tanks anymore," one source said. "So they have to redo their revenue mix, and the federal IT market is going to be their saving grace."Northrop Grumman, for example, knows it will not be a major defense player when it has to go up against industry giant Lockheed Martin Corp., which unsuccessfully tried to buy Northrop Grumman last year, sources said. "But on the IT side, Northrop can be a big player in a small pond," a source said.Litton Industries, parent of PRC Inc., also is in a good position to make a move now because it has had time to digest its $432 million acquisition of Reading, Mass.-based TASC Inc. in April 1998, a source said. "There's quite a bit of interest because [the Boeing unit is] an IT services business," said Richard Knop, a partner with the investment banking firm Boles, Knop & Co. of Middleburg, Va. "A lot of companies are looking to build more services business." One industry official speculated that Boeing is trying to set up an auction."The buyer will be a government contractor with better than $1 billion in revenue, and the deal will most likely be for cash," said one source. "Typically with a divestiture, they want cash. They aren't going to want another company's stock," the source said. One company approached about the sale was CACI International, which had 1998 revenue of about $326 million. Sources said the sale would be too big for a company the size of CACI. "It would make sense for [Boeing] to sell the IT unit," said Nisbet. "It's not a core business, so it is probably more a pain than it's worth." Because the unit is so small, and Boeing has problems with its core aircraft business, the IT services business likely never gets much attention from Boeing's chairman and chief executive, Philip Condit, sources said. "It just doesn't get on the radar screen," one industry source said.