Affiliated Computer Services Preps for Bigger Business

March 17, 2000

Affiliated Computer Services Inc. stands ready to go head to head with the nation's top systems integrators in the government health care services arena after its purchase last month of Birch & Davis Holdings Inc., a leading provider of health care management and consulting.

By Steve LeSueurSo what will you do when you cash in your business?Herb Birch, 55, formed a band, bought a restaurant so he would have a place to play, and created his own production company to record the songs he and fellow band members write: The Bubba Mac Blues Band, the Bubba Mac Shack and Bubba Mac Productions, respectively."I've always wanted to do something that was direct customer service," Birch said. "With this, either people will throw tomatoes or cheer wildly."For the past 24 years, Birch has spent much of his time building up Birch & Davis Holdings Inc., a company specializing in health care management. He served as chairman of a company that saw annual revenue reach $70 million, serving clients in all 50 states and in every department of the federal government involved in health care.A blues guitarist, Birch would often sit in with local musicians ? sometimes invited and sometimes not, he said ? when he traveled on business. He used the name "Bubba" when he played.When Birch and his partners decided to get out a couple of years ago "as part of the normal cycle of business," they began looking for a buyer. Then, a year ago, he formed a blues band and began playing in the south New Jersey area.Birch would not say how much money he received when Affiliated Computer Services Inc. last month completed its purchase of Birch & Davis for $75 million, but said he and his wife owned more than 35 percent of the company, more than enough to help bankroll the restaurant and band.Birch still will provide some consulting to his old business, but the bulk of his time will be spent with his music and his Somers Point, N.J., restaurant, which opened March 15. The band already has an 11-song CD, called "Road Kill Cafe." And when the Bubba Mac Blues Band is not playing, Birch will bring to his restaurant some of his own blues heroes, such as Johnny Winter and James Cotton.As for his new business, Birch does not expect money to be quite so tight the second time around."We started Birch & Davis with two credit cards and a prayer. American Express funded us," he said, "but we paid them back."

By Steve LeSueur, Editor

Affiliated Computer Services Inc. stands ready to go head to head with the nation's top systems integrators in the government health care services arena after its purchase last month of Birch & Davis Holdings Inc., a leading provider of health care management and consulting.

ACS paid $75 million in a cash transaction for the privately held Birch & Davis of Silver Spring, Md. The deal, which was completed Feb. 29, brought more than 600 employees to the Dallas-based ACS.

The acquisition complements ACS' Oct. 1 purchase of Consultec LLC, a company that specialized in processing Medicaid and welfare benefits for state governments.

"Together, Consultec and Birch & Davis give us a full breadth of expertise. We're definitely one-stop shopping," said Warren Edwards, senior vice president of finance and accounting for ACS.

Industry analysts agreed. "This acquisition is another major step forward for ACS to become competitive with the traditional leaders in this market space," said Rishi Sood, a principal government analyst with Dataquest, a research arm of the GartnerGroup of Stamford, Conn.

"This was really important for ACS, because Birch & Davis had a very good reputation among its state customers," said Thomas Meagher, an analyst with Scott and Stringfellow Inc., a banking investment firm in Richmond, Va.

One of the top systems integrators in the government information technology arena, ACS had 1999 revenue of $1.6 billion. The company's state and local government revenue was more than $250 million, Edwards said. The company's revenue has grown at an average rate of 32 percent annually during the past five years, he said.

Birch & Davis is comprised of Birch & Davis Associates, which primarily serves federal agencies, and Birch & Davis Health Management Corp., which serves state and local governments. The company had revenue of about $70 million last year.

With the acquisition of Birch & Davis, ACS immediately becomes the No. 3 company in the government health care market, trailing only Electronic Data Systems Corp. and Unisys Corp., said Thomas Davies, senior vice president with Current Analysis Inc., Sterling Va. Other major players are Lockheed Martin Corp. and Maximus Inc.

The health care services market, estimated by Davies at more than $1 billion annually, represents a significant portion of spending on information technology by departments of health around the United States. Sood estimated that total IT spending by state and local health departments will grow 6.5 percent annually over the next four years, from $4.15 billion in 2000 to $5.34 billion in 2003.

A key part of the Birch & Davis portfolio is the Children's Health Insurance Program, awarded by Texas to the company in December 1999. Under the contract, valued at more than $50 million over three years, the company will manage the health care for more than 400,000 uninsured Texas children in one of the largest health insurance programs in the nation.

"The Texas contract will be an important reference account for ACS and should be a good foundation to capture similar opportunities," Sood said.

Birch & Davis was founded in 1976 and competed for federal contracts under the Small Business Administration's 8(a) program for minority and disadvantaged businesses for about 10 years, said Herb Birch, chairman and co-founder of the company. "We are proud graduates of the 8(a) program," he said.

ACS has been an aggressive player in the acquisition market, having purchased more than 50 companies since its 1988 inception, Edwards said. The company looks at more than 200 deals each year, and usually closes three or four.

Interestingly, Birch & Davis pursued ACS, rather than the other way around, after the owners decided to get out of the business.

"When we saw the [ACS] acquisition of Consultec, we thought it would be a perfect marriage," Birch said.

Herb Birch

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