Government Companies Catch IPO Fever

By Richard McCaffery and Nick Wakeman, Staff Writers



Two companies that provide a range of information technology and electronic commerce services to government organizations at the state, local and federal levels have signaled plans to go public this summer.

The planned stock offerings are the first this year by companies focused almost exclusively on the government market, analysts said. If the offerings are successful, look for other federal contractors to copy them, they said.

AverStar Inc. of Burlington, Mass., which provides information systems assurance and system life-cycle services, as well as software development, almost exclusively to government clients, filed its initial public offering with the Securities and Exchange Commission May 14.

The company, which has been using acquisitions to fuel its growth and had about $169 million in revenue in 1998, plans to use proceeds from the offering to pay down debt and continue its acquisition spree, according to its filing.

The success of this IPO will be watched closely by other federal information technology contractors, such as Anteon Corp., Fairfax, Va.; Veridian Corp., Alexandria, Va.; and Federal Data Corp., Bethesda, Md., which have been building themselves through aggressive acquisitions.

"If they are successful, it could open up a new way of thinking for the others," said John Allen, vice president of the investment banking firm Quarterdeck Investment Partners in Los Angeles.

Also ready to jump into the public market is National Information Consortium Inc. of Overland, Kan., an Internet company that hopes to raise $150 million, according to its May 6 filing at the Security and Exchange Commission.

The company, which designs, builds and operates Internet portals for eight states and one local government, wants to grow its state and local business and enter the federal and international government space.

William Bradley, NIC's executive vice president of strategy, policy and legal matters, confirmed the action but declined comment because of the SEC filing. Investment bank Hambrecht & Quist Group is lead manager of the NIC offering. NIC did not disclose in its filing the number of shares it planned to sell or the offering price.

NIC plans to use proceeds from the offering for general corporate purposes, marketing, product development and potential acquisitions. The company plans to trade on the Nasdaq National Market under the symbol egov.

"I think there's huge potential for companies that focus on that area," said Ken Fleming, an analyst at Renaissance Capital Corp. of Greenwich, Conn.

Though Wall Street sometimes frowns on companies that work primarily with the government, that is mitigated in this case, because NIC focuses on the Internet, Fleming said. In addition, there is growing recognition that the government needs these services, he said.

NIC derives most of its business from offering access to drivers' licenses and other records at state motor vehicle departments. Its revenue comes from selling access to government records, from subscriptions, from managing government electronic commerce offerings and from application development.

It had pro forma revenue of $36.5 million last year, up from $24.3 million the year before. Like many of its Internet peers, NIC is losing money. It reported pro forma losses of $9.2 million last year, up from $6.9 million the year before.

The company's $150 million target is large compared to most Internet initial public offerings, Fleming said. Online trading company eBay Inc. of San Francisco, for example, sold just over 4 million shares last summer and raised $66 million.

The small float (number of shares available for trading) explains in part why Internet stocks have soared — the lack of shares creates sizzling demand, Fleming said. A flurry of Internet companies have hit the public markets recently.

Gary Lambert, deputy state purchasing agent for Massachusetts, said he expects to see more companies stepping into the government Internet arena, focusing on applications ranging from Web portal services to procurement functions and business to business services.

"I like the fact there are companies that have figured out that the government is a market, not just a filler," Lambert said. These companies understand that the government "wants to be on the cutting edge of these services."

The trick is understanding that every state has a different culture and needs different services, he said. Companies stepping into the field must have applications that offer a core set of services and must be flexible enough to deliver customized applications quickly, Lambert said.

Despite the potential, NIC will compete with systems integrators such as American Management Systems and Science Applications International Inc., as well as Web service companies such as AppNet Systems Inc. and Verio Inc.

In addition, NIC will compete with government agencies that already provide Web services. The federal government has been providing its own Web hosting for several years. The National Technical Information Service, part of the Commerce Department, created FedWorld in 1992. It is an online resource that operates Web sites for virtually every major agency, said Renee Edwards, public affairs director of the service.

NIC was founded in 1991 when the state of Kansas selected it to provide electronic government solutions through a public/private partnership. Since then, NIC formed partnerships with governments in seven other states: Arkansas, Georgia, Indiana, Iowa, Maine, Nebraska and Virginia, and one city-county government, the city of Indianapolis and Marion County, Ind.

In March 1998, NIC combined its five affiliate business units into one consolidated company. The company plans to pursue similar government business using the same model it has had success with so far, according to the filing. Its strategy includes penetrating new markets using existing partnerships, developing new products and services, increasing Web traffic with existing customers and leveraging its economies of scale, according to the filing.

For AverStar's management team, going public has been on the radar screen from the start. "This has been part of our strategy from the beginning," said Paul Serotkin, vice president of corporate development.

AverStar was formed in February 1998 when Intermetrics Inc. and Pacer Infotec Inc. merged to form a company that provides information systems assurance services, systems life-cycle services and software development.

In 1998, the company had about $169 million in revenue. Nearly all of its revenue is from the federal government. Major customers include the Postal Service, NASA, the Navy, the Health Care Finance Administration and the Immigration and Naturalization Service.

The company is one of several federal contractors that has been on a buying spree. In March, AverStar acquired Computer Based Systems Inc. of Fairfax, Va., for an undisclosed amount. CBSI has about 600 employees.

Before Pacer and Intermetrics merged, Pacer was making acquisitions.

AverStar's filing with the Security and Exchange Commission did not state the number of shares that will be offered.

The offering price and the number of shares to be sold will be stated in later amendments to the filing.

"We are still talking to the bankers," Serotkin said. Legg Mason Inc. of Baltimore and Bear Stearns & Co. of New York are underwriting the AverStar offering.

A key to a successful IPO for AverStar will be getting investors to look at its cash flow rather than its earnings per share, said Jerry Grossman, a director with the investment banking firm Houlihan Lokey Howard & Zukin of McLean, Va.

Acquisitions have depressed AverStar's earnings per share because of the goodwill it has to amortize, Grossman said. Averstar's earnings per share do not reflect the real value of the company, he said.

Cash flow is a better indicator of health because it is the "life blood of a company," Grossman said. AverStar's cash flow is about $13 million, which is good for a company that size, he said.

"The job for Legg Mason and Bear Stearns is to get the investors to focus on cash flow," he said. "If they can do that, they will set a nice pattern for other consolidators who have the same issue."

Grossman said he expected AverStar's IPO to generate $85 million to $90 million.

Pluses for AverStar are its management and the company's roots in the public market, Allen said. Pacer was traded publicly before merging with Intermetrics, and Intermetrics was public before going private through a management buyout in 1995.

"The principals of this company know the demands of being a public company," Allen said.

AverStar also is putting forward a clear business strategy of staying focused on the government market, while exploring commercial opportunities and making acquisitions, Grossman said. "It is a solid strategy."