SI International Skips To Next Deal

By Nick Wakeman, Staff WriterSI International Inc. is hot on the trail of its third acquisition of 1999 as it builds itself into a broad-based federal information technology company.The Vienna, Va., company is in negotiations with four companies and at least one deal should be wrapped up by the end of the year, top executives said.All the acquisition candidates are consulting companies with less than $50 million in annual revenue, said Ray Oleson, SI International chairman and chief executive officer. But those with security and database specialties are the most enticing, he said."There are a lot of great niche companies out there whose owners want to cash out but are too small to really be looked at by [other consolidation companies]," he said.In building a company that can provide consulting, systems development and operations and training, Oleson intends to focus on what he called application services.The next acquisition should bump SI International's revenue from $45 million to nearly $100 million, he said. Other acquisitions will follow.SI International, which is being backed by the Chicago-based equity investment group Frontenac Co., is one of several companies reshaping the federal IT landscape using a roll-up strategy of acquiring a series of smaller companies to create a larger one.The company got its start in January when it bought Statistica Inc., a $20 million-a-year Gaithersburg, Md., company that provides services such as database management and outsourcing. On July 12, the company purchased WPI Inc., a $15 million-a-year Rockville, Md., company that develops online training and other tools to improve performance. Primary customers for both companies are federal government agencies.The acquisitions are a start to what Oleson hopes will be a $300 million-a-year company by 2002 that is ready to go public when market conditions are right.Whether the acquisitions will put SI International in a position to go public is open to debate, said Jon Kutler, president of the investment banking firm Quarterdeck Investment Partners of Los Angeles. "The IPO window comes and goes in the government sector, and it is closed more often than it is open," he said.Although his goal is to take the company public, Oleson said options such as a sale or merger with another company also are possible.But for now, the focus is on acquisitions and internal growth. "We are in constant negotiations," he said.Oleson said SI will follow a commercial model in structuring and delivering its services to the government. "We have an advantage because we are taking a blank piece of paper and starting from scratch," he said. "We understand what it means to be a government contractor and we have the flexibility to build a new kind of company to support the federal customer."Some of the company's current customers include the departments of Defense, Energy and State, the Immigration and Naturalization Service and the Office of Personnel Management.One major strength of SI International is the management team assembled by Oleson, analysts said. Oleson was chief operating officer at CACI International Inc. of Arlington, Va., until 1996. Other key executives include Walter Culver, president and chief operating officer, a former executive at Computer Sciences Corp. of El Segundo, Calif.; and Thomas Lloyd, who is heading up merger and acquisition activities. He held a similar post at CACI."They have the key ingredient, which is experienced management," said Thomas Meagher, a principal at the investment banking firm Boles, Knop & Co. of Middleburg, Va.Said Oleson: "Even though we are starting out with a small revenue base, we have started out with a core management team that really looks like we are already a $300 million-a-year company." While there are now several equity groups such as Frontenac operating in the government market, more would come in if they could find the right management teams, Meagher said.Although other investment groups such as the Washington-based Carlyle Group, which is backing Federal Data Corp. of Bethesda, Md., and New York-based Caxton-Iseman, which is behind Anteon Corp. of Fairfax, Va., have an earlier start in the consolidation game, it is not too late for a new entry, said Douglas Schmidt, managing partner of Legg Mason Inc. of Baltimore.Some of the other major consolidation players are "digesting a lot of deals right now. There is going to be a lot of opportunity for SI," Schmidt said.While acquisitions are taking much of Oleson's time, Culver is focused squarely on internal operations. So far, the company has exceeded its internal growth target of 15 percent, with a 35 percent growth rate since the beginning of the year.In March, the company won a $26 million, three-year contract with the Energy Department to do Web applications, network services and document management. That win was important from a revenue standpoint but also because the agency is a new customer, Culver said.