More Suitors on CACI's Horizon

By Nick Wakeman, Staff WriterCACI International Inc. of Arlington, Va., won its battle with a dissident shareholder, but votes cast against the company's board and management are driving it to step up investor relations activities and may pressure it to look harder at future buyout offers. At an annual shareholders' meeting Dec. 9, in Alexandria, Va., Alan Parsow, who owns about 5 percent of CACI's stock, failed in his attempt to wrest control of the board and force a sale of the company. But major institutional investors Kennedy Capital Management of St. Louis, Neuberger & Berman LLC of New York and Wanger Asset Management of Chicago sided with Parsow. These three institutional investors own more than 21 percent of CACI's stock. The portfolio managers for those investment groups declined to comment on their votes. Parsow, however, told Washington Technology that the message the institutional investors were trying to send is "they want the company sold." He has said repeatedly that the system integrator's stock has reached full value and that the best way to unlock shareholder value is to sell the company. But CACI Chairman and Chief Executive John "Jack" London said the lesson he took from the shareholders meeting is not that the institutional investors want a sale of the company, but that they are dissatisfied with the company's stock performance and they want to see profit margins improve.Some analysts agreed with London. "My sense was they were saying the stock price just hasn't done anything," said Thomas Meagher, vice president of equity research for investment banking firm BB&T Scott and Stringfellow in Vienna, Va."I think we are listening, and we are sensitive to our shareholders," London said.CACI's operating profit margin was 6.1 percent for its fiscal year 1999, which ended June 30, 1999, compared with 6.2 percent in fiscal 1998. Revenue rose to $441.7 million in 1999 from $326.1 million in 1998. In the past year, CACI stock has ranged from a low of $16 per share to a high of $24. Since the Dec. 9 shareholder's meeting, the price generally has remained in the $21.25 range as of Dec. 21.London said his goal for fiscal 2000 is to raise the operating margin to 6.5 percent. The company reported a 6.1 percent margin for its first quarter that ended Sept. 30, but the margin was restated to 6.4 percent Dec. 20 to reflect the company's sale late last year of its Comnet Products Group, London said. CACI sold the group, which makes simulation products, to Compuware Corp. of Farmington Hills, Mich., Dec. 16 for $40 million. CACI also is on track to top the $500 million mark in revenue for 2000, London said.In addition to improving margins, London said he plans to reach out to shareholders and tell CACI's story. "I'm going to do more field visits with shareholders, and we'll be talking to the investment community that has a strong interest in small-cap companies," he said.While praising CACI's growth and business strategies, investor relations consultant Douglas Poretz, principal of the Poretz Group, McLean, Va., said London faces a tough sales job. "The reality is that he is in a business that has the Department of Defense as a large part of its customer base, and that is not liked by institutional investors and analysts," said Poretz, who provided CACI's investor relations services until the company began doing investor relations in-house at the end of 1997.CACI is best suited for investors looking for steady growth but low downside risk, said Poretz, who described Parsow as a "professional irritant shareholder."But more outreach is a good idea, Meagher said. "CACI has always been insular, but that is changing now," he said."I think the vote really sensitized the board that Wall Street is unhappy, and they need to make sure that they continue to pay attention to shareholders," said William Loomis, an analyst with the investment bank Legg Mason Wood Walker Inc. of Baltimore. He said that while he is not sure if the vote at the annual meeting makes a sale of CACI more probable, "I think they will be more likely to take a closer look at credible offers."That contention lies at the heart of Parsow's complaints: that CACI does not take buyout offers seriously. In a lawsuit filed against CACI in November 1999, he said that 10 companies have approached CACI, but that the board has declined to negotiate with them.London has acknowledged only an overture by Anteon Corp. of Fairfax, Va., but he would not detail how far negotiations went or why they fell apart. Anteon President Joseph Kampf declined to comment on his bid for CACI, but he told Washington Technology that CACI would make a good acquisition for his government systems integration company. London said members of CACI's board have extensive merger and acquisition experience as both buyers and sellers. Plus, the company has used the investment banking firm CIBC Oppenheimer as a consultant on acquisitions and other matters. But a sale is not the best or only way to unlock shareholder value, said Michael Coady, an analyst with Sidoti & Co. of New York. "Their main focus should be to grow earnings and revenue and not just look at the short-term share price," he said.London said he intends to stay the course and is not actively looking for a buyer. His goal is for CACI to reach $1 billion in annual revenue by the 2004-2005 time frame through strong internal growth and acquisitions. Hot growth areas for the company are intelligence, information security, network services and electronic commerce, he said.But if the company continues to grow and improve its profit margin, London said, CACI will become an attractive takeover target. And if the right price comes from a "credible" company, CACI and its board will consider a buyout, he said.London said he strongly disagrees with assertions that he and the board will only consider a very high premium over CACI's share price. "It is not a number no one can reach," he said, declining to elaborate.If CACI improves its margins into the 7 percent to 8 percent range, it likely will get the kind of offers London and the board would find attractive, Meagher said.CACI and Parsow have one last fight to wage. In response to Parsow's Nov. 10 lawsuit, CACI filed a countersuit Dec. 8. The suits are filed in U.S. District Court in Delaware. Both sides claim the other violated Securities and Exchange Commission regulations. No trial dates have been set.