Lockheed IMS Unit Awaits a New Owner

By Nick Wakeman, Staff Writer

The sale of Lockheed Martin Corp.'s state and local unit should be completed this summer, with the likely buyer being a private investment group, according to industry sources.

Officials with the Bethesda, Md.-based aerospace and systems integration company declined to comment on specifics of the sale of Lockheed Martin IMS Corp., other than to confirm that the company is for sale and that the goal is to find a buyer by the end of the summer.

An industry source familiar with the IMS unit said the primary buying candidates are the Blackstone Group and Kohlberg Kravis Roberts & Co., both New York-based investment firms. Both companies declined to comment on their interest in Lockheed Martin IMS.

While not commenting on either firm as a potential buyer, Lockheed Martin spokesman Terry Lynam said the company wants to sell the IMS unit to a single buyer. IMS, based in Washington, posts annual revenue of about $500 million.

"We have always believed IMS as a whole is worth more than the sum of its parts," Lynam said. Breaking the unit apart and selling to individual buyers would not bring the "greatest return to the corporation," he said.

If Lockheed Martin had decided to break up the unit, it likely would have found many interested buyers, such as Electronic Data Systems Corp. of Plano, Texas, Affiliated Computer Services Inc. of Dallas and Maximus Inc. of McLean, Va., another industry source said.

Maximus approached Lockheed Martin about buying parts of the company, but Lockheed Martin never responded, the source said.

Lockheed Martin is selling off IMS and several other units as the company tries to generate cash and focus more resources on its core aerospace and systems integration business, company and industry officials said.

In 1999 Lockheed Martin saw its revenue drop 3 percent to $25.5 billion, but net earnings took an even bigger hit, dropping from $1 billion in 1998 to $382 million in 1999. In the past 12 months, the company's stock has ranged from $16.38 per share to $39.94. On June 21, it closed at $24.25 on the New York Stock Exchange.

In a letter to Lockheed Martin employees earlier this year, Chairman and Chief Executive Vance Coffman said that along with IMS, Lockheed Martin was selling seven other divisions: Sanders, Control Systems, Infrared Imaging Systems, Fairchild Systems, Retech, Energy Technologies and Space Electronics.

At the end of 1999, Lockheed Martin sold Hanford Corp., an environmental management contractor, to CH2M Hill Ltd. of Englewood, Colo., for an undisclosed amount. In April, BAE Systems Plc of Farnborough, England, bought Control Systems for $510 million in cash.

The divestitures are being driven in large part by a need for cash to pay down debt, said Paul Nisbet, an analyst with JSA Research Inc. of Newport, R.I.

"Their cash flow is barely enough to pay the interest on their debt, much less pay down their debt," he said.

At the end of the first quarter 2000, Lockheed Martin's long- and short-term debt stood at $11.7 billion, Nisbet said.

"Like a lot of companies that have done a large number of acquisitions, Lockheed Martin is looking at its portfolio and is pruning its portfolio," said John Allen with the investment banking firm Quarterdeck Investment Partners of Los Angeles.

Quarterdeck represented Lockheed Martin in the sale of Hanford and is working with the company to sell Energy Technologies, which is demilitarizing nuclear weapons in the former Soviet Union, and Retech, a Ukiah, Calif.-based unit that makes products to process high-level waste.

The IMS unit, while considered a good performer, uses a lot of cash to operate, a source said.

"IMS uses a lot of cash because it has a lot of upfront infrastructure costs," the source said. "It is just the nature of its business."

Another reason Lockheed Martin might want to sell IMS is that the state and local government business is very different from the federal government business, said Jerry Grossman, a managing director at the investment banking firm Houlihan, Lokey, Howard & Zukin of McLean, Va.

"Sales cycles are different, the selling process is different, the decision-making process is different in the state and local market. It is a unique animal in relation to the federal government business," he said.

If a company is trying to focus on core capabilities and core markets, it makes sense to sell off a unit that operates in such a different market, even if the unit is very successful, Grossman said.

The IMS unit has five divisions ? Information Resource Management, Municipal Services, Transportation Systems and Services, Welfare and Workforce Services and Children and Family Services and has experienced an annual growth rate of 34 percent over the past 16 years, according to its Web page.

"It doesn't appear that they are selling it because it is performing poorly," Grossman said.

The unit builds and operates systems that collect and distribute $6.8 billion in child support payments each year. The unit also processes 400 million electronic toll transactions, collecting $1.2 billion in revenue for various states and local jurisdictions, according to the Web page.

IMS also has provided online training and job placement services for 100,000 people over the last four years.

The unit is led by John Brophy, president of the unit since 1988. Lockheed Martin created the IMS unit when it bought Datacom Systems Corp. in 1984. A year earlier, Datacom had purchased Brophy's company, Brophy & Associates, an urban parking and transportation consulting firm.

Major customers for IMS include Washington, where the unit runs the city's parking meter system including collecting fines. The New York State Thruway Authority is another major customer. In total, IMS has 220 contracts and more than 4,000 employees serving 200 jurisdictions in the United States, Europe and Australia.

The unit has picked narrow but lucrative niches such as the child support payment systems where it can build a solution and then reuse that solution in multiple jurisdictions, an industry source said.

"They are a niche company but they tend to have a high market share in those niches," the source said.