CSC Bulks Up With Buy

By Nick WakemanComputer Sciences Corp.'s acquisition of Nichols Research Corp. positions the $8 billion systems integrator to win more defense and intelligence outsourcing work and makes it even more formidable in the federal market, analysts and company officials said. CSC executives are banking on winning outsourcing opportunities from large Department of Defense installations such as the U.S. Army's Redstone Arsenal in Nichols' hometown of Huntsville, Ala. Nichols, which pulls 77 percent of its business from the federal government, has a contract backlog of $1.2 billion. El Segundo, Calif.-based CSC picks up 3,000 employees and $455 million in revenue from Nichols in the stock swap deal expected to close by Nov. 29. The deal is valued at about $391 million.Nichols Chairman and CEO Chris Horgen, a co-founder of the company, told analysts last week the company faced pressures to get bigger and a low market valuation. After an assessment of the conditions in its markets and in the public markets, "the action was required," he said.The principal benefit of this acquisition for CSC is that it "significantly enhances and deepens" our capabilities in space and missile defense, intelligence, information assurance and outsourcing, Milton Cooper, president of CSC's federal sector, told WashingtonTechnology. Nichols' services are well respected in the U.S. federal defense and intelligence areas and within other civil agencies, said Van Honeycutt, CSC chairman, president and chief executive. With the acquisition, CSC's government business will grow from about $1.9 billion to $2.3 billion. Overall, CSC's total revenue will grow from about $8 billion to more than $8.4 billion.Nichols, which was founded in 1976, bolsters key CSC business areas such as consulting and health care but its defense business is clearly the crown jewel. Approximately 50 percent of Nichols' business comes from the defense and intelligence agencies and 27 percent from federal civilian agencies. The rest is split between health care and consulting."This is a company we have coveted for quite a long time," said Cooper, who singled out Nichols' federal sector clients and technical capabilities. The Huntsville area should be ripe with future contracting opportunities, industry experts said. Besides the U.S. Army, there are other defense facilities as well as NASA's Marshall Space Flight Center.This deal gives CSC a stronger Huntsville presence, something that was surely "a motivating factor for them," said Richard Knop, a partner with the investment banking firm, Boles, Knop & Co. of Middleburg, Va.CSC already has 2,300 IT workers in the Huntsville area; Nichols brings another 1,300. CSC currently has 16,000 employes working in the public sector.As for plans to integrate Nichols into CSC's corporate structure, Cooper said some employes will move under Nichols managers in areas such as missile defense. In other areas, such as intelligence, Nichols employes will report to CSC managers, he said."But we will all go to market as CSC," Cooper said.The Redstone Arsenal is home to the Army's Aviation and Missile Command, which is expected to outsource its information technology infrastructure during the next two years, said Tom Robinson, president of CSC's defense group.Though still in the planning stages, the procurement is expected to be worth $100 million a year, he said. The command is expected to outsource mainframes, networks, desktop computers and applications. "With Nichols' customer relationships and skills sets and our commercial best practices, we should have a strong position for this opportunity," Robinson said. "We definitely see significant opportunities in the government around outsourcing." Huntsville "is an important geographic location," said Philip Odeen, executive vice president and general manager of TRW Systems and Information Technology Group. The growth plans of his $3 billion unit of TRW, based in Reston, Va., are keyed to many of the defense outsourcing opportunities being eyed by CSC.With Nichols merged with CSC, Odeen sees CSC as a major competitor even more now than in the past. "Missile defense is an important area, so I'm sure that is one of the reasons they wanted Nichols," he said.The acquisition of Nichols also boosts CSC's chances of winning a spot on the $1.5 billion Omnibus 2000 contract, which is expected to be awarded March 2000. Both CSC and Nichols are bidders on the Omnibus contract, which will go to multiple winners to provide IT support services to the Army.The acquisition of publicly traded Nichols continues the consolidation trend in the federal sector."This reinforces that consolidation is continuing in the federal market," said Jon Kutler, president of the investment banking firm Quarterdeck Investment Partners of Los Angeles. "The big are getting bigger." "Midsize companies are concerned about being competitive and having continued growth," said Jerry Grossman, a director at Houlihan, Lokey Howard & Zukin. "Public midsize companies also are concerned about their valuations."The public market has backed away from midsize companies in the past year, feeding those companies' concern about valuation, he said. "This acquisition fits that pattern," he said.Former independent companies such as BDM International Inc., Computer Data Systems Inc., and PRC Inc. faced similar challenges in recent years from changes in procurement laws and public market pressure and had to find buyers, industry officials said."CDSI was a very successful company but to compete against the top tier, you need mega capacity, that's why CDSI and ACS came together," said William Woodard, president of Government Solutions Group for Affiliated Computer Services Inc. of Dallas, which bought CDSI in December 1997."But this really shows that big time commercial firms see the federal market as worthy of investment," Woodard said.The timing of last week's deal was not surprising to industry insiders. Last month, Nichols cancelled the planned initial public offering of its commercial health care unit, Nichols TXEN Corp., and hired Goldman Sachs & Co. of New York to evaluate strategic alternatives. XXXSPLITXXX-CSC (NYSE)   NRES (Nasdaq)   $455 million   Huntsville, Ala.   Federal IT services   Defense & intelligence   Government IT   Commercial IT   Health care IT   77% federal   23% commercial, state and local    government, and judicial systems   Information processing   Systems development   Systems integration