With Latest Buy, Titan Joins Big Boys

By Nick Wakeman, Staff WriterTitan Corp. of San Diego has vaulted itself into the upper tier of government information technology providers with two major acquisitions in the opening months of 2000.Less than a month after closing its $175 million deal for Advanced Communications Systems Inc. of Fairfax, Va., publicly traded Titan announced March 27 its intent to acquire AverStar Inc. of Burlington, Mass., for $140 million in stock and the assumption of about $65 million in debt.The two deals more than double Titan's size in the federal information technology market to $800 million-plus in annualized revenue, positioning the company to compete head to head with the likes of Affiliated Computer Services Inc., Computer Sciences Corp., Litton-PRC Inc., Lockheed Martin Corp., Logicon Inc. and Science Applications International Corp."This moves them into a new tier," said John Allen, vice president of the investment banking firm Quarterdeck Investment Partners of Los Angeles. "They have leap-frogged over the other middle-tier companies."And not only is Titan becoming increasingly competitive in the federal market, "they are going to keep making deals," said Richard Knop, a partner in the investment banking firm Boles Knop & Co. of Middleburg, Va.With the acquisition of AverStar, Titan is picking up expertise in information assurance, information operations and network and information security. Titan, primarily a defense and intelligence contractor, also gains new civilian government customers from AverStar, including the Environmental Protection Agency, NASA, the Patent and Trademark Office and the U.S. Postal Service."This is a very good diversification into other business areas for us," Gene Ray, Titan chairman, president and chief executive, told Washington Technology.When Titan's government IT work, its commercial ventures and the recent acquisitions are combined, the company hits an annual revenue run rate of more than $1 billion, Ray said. About 80 percent of that is in the federal IT market. In 1999, total company revenue was $407 million, compared with $303 million in 1998.AverStar had about $230 million in 1999 revenue, with 22 percent coming from Defense Department agencies, 66 percent from civilian agencies and 12 percent from commercial customers. Michael Alexander, AverStar chairman and CEO, said the two companies never really competed but have complementary customers and locations. With AverStar, Titan will have an increased presence in places with a large government customer base, such as Boston; Patuxent River, Md.; Charleston, S.C.; and Houston, Alexander said. AverStar had been pursuing an independent track, making its own acquisitions, and at one time planned to go public. But Titan approached the company in February with an offer too good to pass up, he said.The acquisition gives Averstar "the ability to bid on larger, more comprehensive contracts that we didn't have the credibility on before," Alexander said.Chasing larger contracts is a driving motivation for Titan's government-related acquisitions, Ray said. His goal is to have a government IT unit with more than $1 billion in annual revenue.With that kind of size, Titan will be able to bid on large contracts that are often worth more than $100 million and call for a broad base of IT skills, Ray said."I truly believe the government IT market is going to grow, especially on the defense side," he said. "I think we can see a defense buildup similar to 20 years ago."Such an increase in defense funding will rely heavily on technology to collect and distribute information, Ray said. The ACS acquisition, which brings communications skills, and the AverStar acquisition, with its information assurance and networking skills, put Titan in a strong position to compete for that kind of work, he said. The challenge for Titan, which has made four smaller government-related acquisitions in the past year, will be integrating its acquisitions to take advantage of what it has acquired, analysts said. "Titan has a lot of knitting together to do of its acquisitions," said Douglas Schmidt, managing director of investment banking firm Legg Mason Inc. of Baltimore. Titan's general business model after buying companies is to leave the acquired company as a separate business unit. AverStar, for example, will be known as AverStar, a Titan Corp. company.Buying complementary companies is a good strategy, said Jerry Grossman, managing director at the investment banking firm Houlihan Lokey Howard & Zukin in McLean, Va. "These are the kinds of companies that can operate side by side. You don't see much duplicative costs," he said.Ray said he centralizes all the marketing and sales efforts of his units, which cuts down on the problem of units competing against each other.When pursuing large contracts, one unit will take the lead role with the others joining in similar to subcontractors, Ray said. "It is all well-defined," he said.Titan also likes to create business units and is doing that with parts of AverStar. Ray said AverStar's commercial IT work will be broken out as its own unit that will focus on the financial services industry.Titan also is creating an information assurance unit from parts of AverStar and other Titan units, which will pursue both commercial and government work.The acquisition of AverStar is expected to close by mid-May, and despite making two large deals, Titan's thirst for more acquisitions has not been quenched."We are going to continue to be a proactive participant in our industry's consolidation," Ray said. Both the AverStar and the ACS deals were for stock and do not weaken Titan's ability to make more deals. "We are interested in any size company that fits our criteria," he said.Along with boosting federal IT business past the $1 billion-a-year-mark, Ray's goal is to find new technologies that can be built into successful commercial ventures. That strategy has very been successful, according to analysts.Titan's stock hit a 12-month high March 27, closing at $57.48, up $4.23 from the previous close. A year ago, Titan's stock was trading at $5 a share.That rise has been fueled by the success of Titan's food and medical equipment sterilization unit, Titan Scan. The unit is using technology the company developed while working on the Strategic Defense Initiative, also known as Star Wars. Titan has signed agreements with 75 percent of the ground-beef makers in the United States and with half of the poultry producers. It also has a development deal with Kraft Foods, Ray said.Titan also has a commercial electronic commerce unit called Cayenta that will be spun off in an initial public offering later this year. Titan will remain the majority stockholder after the IPO.Titan's stock is valued so high, its price could drop 50 percent and Titan would still have more buying clout than the other government IT companies, Grossman said. "When a company is priced that way, they can pay a very competitive price without giving up much," he said.And with Titan's strong stock, the company has the "currency" to keep making deals, Knop said. "They are on a real roll, no doubt about it," he said.