Veridian, McBride Dip Into Acquisition Pool

By Richard McCafferyStaff WriterThe merger and acquisition waters stirred again in June with Veridian Corp. snatching up a research and development company, and McBride & Associates dipping into the pond for the first time to buy Marconi Enterprise Solutions Inc.Veridian Corp., an Alexandria, Va., information technology company, expects its purchase of ERIM International Inc. to add to its skills in the area of remote sensing and Earth imagery. The Ann Arbor, Mich., company will build Veridian's customer base in the intelligence community and lift its revenue to $490 million annually, according to David Langstaff, Veridian's chief executive officer."I'm pleased with the focus we've got," Langstaff said. "I'm pleased with the way the team is coming together." ERIM is the fifth company Veridian has bought in less than two years. The deal follows on the heels of its purchase of Trident Data Systems of Los Angeles in April. Terms of the ERIM deal were not disclosed, but the company had sales of $87 million last year. As a rule, federal IT companies are valued at a rate that ranges from 50 percent to 75 percent of their annual revenue, analysts said.McBride & Associates, a product reseller and services company, made the first acquisition in its 13-year history with its June 18 purchase of Marconi Enterprise Solutions Inc. of Reston, Va. Terms of the deal were not disclosed.Teresa McBride, founder and chief executive officer of McBride & Associates, declined to disclose McBride's or Marconi's revenue, but one industry source put the figures at about $100 million and $50 million, respectively.The move is expected to expand McBride & Associate's engineering skill base, global information systems offerings and facilities management services, especially in the intelligence community, McBride said. The company now has 400 employees, twice what it had before the acquisition. "This was a good match for us," McBride said. Marconi "is sound financially, profitable and has a good customer mix."Companies in the federal IT sector these days can be divided into two camps: buyers and sellers. Companies are racing to add size as the government packages contracts together and issues bigger awards. There is no sign of consolidation slowing. One industry analyst said the process could take five years."There could be 100 deals we're talking about, or more," said Jon Kutler, president of Quarterdeck Investment Partners Inc. of Los Angeles. Privately held Veridian offers modeling and simulation services, secure networks and communications, and engineering and analysis to the Defense Department, global government customers and state and local agencies. It competes with high-end systems integration companies such as CACI International Inc., Nichols Research Corp., and TRW Inc. About 80 percent of the company's business is with the federal government.ERIM, the Environmental Research Institute of Michigan, was founded 50 years ago as an independent, non-profit research organization tied to the University of Michigan. In May 1997, ERIM spun off ERIM International Inc. as an independent subsidiary to better respond to changes in the fast-moving sensor technology arena. The company has 550 employees. About 50 percent of its business comes from intelligence customers, and 35 percent comes from the Department of Defense. The rest is commercial. Langstaff said the company's technologies will extend its own."It's highly consistent with our focus on global security and safety markets and applications," Langstaff said. "It's a business that brings a leadership position in markets that are important to us. And they are an outstanding technology company."According to Peter Banks, ERIM's president and chief executive officer, Veridian approached ERIM about the acquisition in early January. ERIM was not looking to sell, he said. The company is profitable, its revenue is growing about 15 percent a year, and its earnings are growing about 20 percent a year. But Banks said the cultural fit was perfect, and ERIM decided to seize the opportunity. "We decided we'd rather be with the strongest team than compete against them," he said. The deal is expected to close this fall.Jerry Grossman, director at Houlihan, Lokey, Howard and Zukin of McLean, Va., said the purchase of ERIM fits Veridian's pattern of buying high-end research and development companies with niche technology. "Veridian is clearly not buying your average, run-of-the-mill, government-oriented company," Grossman said. "The companies Veridian is buying are distinguished enough in their capabilities, so they are in a much stronger competitive position in their markets."Anita Antenucci, vice president of Quarterdeck Investment Partners, agreed. "Veridian has been driven to find niches that have incumbency value," she said. "They found high-end niches in the intelligence market ... through the acquisition of ERIM. "The challenge for all the buyers in this marketplace right now isn't just getting bigger ... but doing it in a way that's compatible with their incumbent focus, not just plain vanilla services," she said.Based in Albuquerque, N.M., McBride & Associates does 70 percent of its business with government agencies such as the Army, Navy and the departments of Energy, Justice and Transportation. The company offers a full line of computer products and services, such as business software implementation and systems integration. Services represent 25 percent of the company's revenue. McBride & Associates competes with integrators such as Electronic Data Systems Corp. and Litton Industries Inc.Marconi Enterprise Solutions Inc., the unit it purchased, has a complicated lineage. It was founded 30 years ago as Centel Federal Systems in Reston, Va. In 1991, management bought the unit from its publicly held parent company, took it private and renamed it Cordant Inc. In 1996, the unit was sold to Tracor Inc. and renamed Tracor Enterprise Solutions. Finally, in June 1998, Tracor was bought by an American subsidiary of the General Electric Co. PLC of London. Since GEC focuses on defense electronics and not information technology, its executives decided to sell the Marconi division in January, according to Chuck Woods, the former president of the Enterprise Solutions Group."We're now part of a company that wants to be in this business," he said. All of the company's work is with the federal government.Teresa McBride said she looked at 30 companies before settling on Marconi. She is interested particularly in leveraging the company's facilities management skills into new contracts with McBride's Defense Department customers. "It's data mining and data warehousing," she said. "It's very big in the government space."After 13 years of growing the company internally, McBride said she turned to acquisitions for three reasons: to provide growth opportunities for her employees; to add new technology; and to better compete for contracts. She said the company could make another acquisition before year's end.John Allen, vice president Quarterdeck Investment Partners Inc., said the Marconi unit should fit snugly at McBride. "I can see how there might be some cultural aspects that makes sense from McBride's standpoint," he said. "McBride has a services element to it, so it won't be culture shock to add a services component." In addition, the services business will add higher margin work to the company's reseller business, he said.