ACS Joins Elite With Purchase of SCT Unit

With the acquisition of SCT Corp.'s government unit, Affiliated Computer Services Inc. is positioning itself to compete with the top-tier integrators for large-scale outsourcing projects in the state and local government market.The $85 million cash purchase of SCT "more than doubles" the company's existing local government outsourcing business, and should push the company's annual state and local revenue to $450 million by 2002, said Harvey Braswell, president of ACS' government services division. ACS now has 33 local government outsourcing contracts worth about $150 million to the company in the next fiscal year, he said, making ACS the largest outsourcing contractor among local governments.The added bulk will help ACS compete with the likes of Computer Sciences Corp. of El Segundo, Calif.; Electronic Data Systems Corp. of Plano, Texas; and IBM Corp., of Armonk, N.Y., in the state and local market, Braswell said."This acquisition positions us to compete for the large outsourcing opportunities," similar to those recently awarded in Pennsylvania and Orange and San Diego counties in California, he said.CSC is the prime contractor on a seven-year, $644 million IT outsourcing contract for San Diego County. Lockheed Martin Corp. of Bethesda, Md., is the prime on an 11-year, $260 million outsourcing contract in Orange County, and Unisys Corp. of Blue Bell, Pa., is the prime on a $410 million outsourcing contract in Pennsylvania. "Our vision of the state and local marketplace is to become the largest state and local outsourcing entity," Braswell said.With the July 1 acquisition, ACS picks up several key outsourcing contracts from Systems and Computer Technology Corp. of Malvern, Pa., including a seven-year contract worth $16 million annually with Memphis, Tenn., and a seven and one-half year contract worth $7 million annually with Indianapolis. Braswell said ACS is looking at several local government outsourcing opportunities around the country, worth about $15 million to $20 million each. He declined to name those opportunities.In March, ACS combined its federal and state and local organizations into a new unit renamed ACS Government Services. The combined revenue of the new group will exceed $1 billion in fiscal 2001, with more than $700 million from federal business and $400 million from state and local business, Braswell said.SCT's global government solutions group is based in Lexington, Ky., and has about 800 employees. "It is probably the cleanest acquisition that I've been involved in," said Braswell, referring to the quick turnaround on the SCT purchase. ACS has acquired nearly 50 companies since it was founded in 1988. Since 1995, the company has maintained an annual growth rate of about 30 percent, according to analysts and market research firms.SCT had received repeated offers to sell its government business, but never found one attractive enough until now, said Tom Davies, senior vice president of Current Analysis Inc., Sterling, Va.The acquisition "significantly ex-pands ACS' software business in state and local government, providing it with a larger customer base and a richer portfolio of offerings," Davies said.Mike Emmi, SCT chairman and chief executive officer, said in a statement that the sale would allow SCT to focus on providing software and services to its three remaining markets: education, utilities and process manufacturing.Braswell said ACS will consider more acquisitions for its government business if a company or unit has similar core capabilities and a business that is growing. ACS also will market systems integration services to the 19 government customers it picked up in the acquisition."There's an opportunity to expand systems integration" on those contracts, Braswell said.The acquisition reinforces ACS' commitment to growing its government business, said Rishi Sood, principal analyst at Gartner Dataquest, Stamford, Conn. "Over the past three years, [ACS] has made several acquisitions that took them from a tier-two integrator to being at the cusp of a tier-one integrator," Sood said.The acquisitions of Consultec LLC and Birch and Davis Holdings Inc. broadened ACS' health care expertise, while the acquisitions of Digital Information Systems Co. and Business Resource Corp. brought document management solutions."They are investing in government for the long haul and hoping that outsourcing will bring sufficient revenues to drive their business," he said.But Thomas Meagher, vice president of equity research, BB&T Capital Markets, Richmond, Va., said ACS will need to work just as hard to capture federal outsourcing contracts as it will state and local outsourcing contracts."We are starting to see large outsourcing contracts on the federal side," said Meagher. "ACS is not yet playing in that market."The company should look to become a major subcontractor on some of the federal projects, he said.Braswell said one of the main reasons ACS consolidated its government operations earlier this year was to facilitate the sharing of best practices, such as imaging technologies and business process outsourcing, or BPO, between the groups. "Outsourcing services will continue to be our emphasis, not only because of our strength in the industry, but because BPO contracts provide us with the stable, recurring revenue that helps us continue to build our business," he said. ACS will take the imaging services it has developed on the state and local side and pursue similar contracts on the federal side. At the same time, the company will concentrate heavily on criminal justice and outsourcing in the state and local government market."I've never seen as many opportunities as there are now for outsourcing in state and local government," Braswell said. Outsourcing in the state and local government IT market will grow at an annual rate of 25 percent from $2.4 billion in fiscal 2001 to $4.7 billion in fiscal 2004, according to Gartner Dataquest.ACS is competing against EDS and WellPoint Health Networks Inc. of Thousand Oaks, Calif., in Georgia for administration of health care to state employees, higher education employees, low-income, poor and disabled populations and children, Braswell said. The company also is interested in an opportunity for data center outsourcing in Georgia if it materializes, he said. The acquisition gives ACS a powerful set of justice-related solutions that it didn't have before, Braswell said. SCT brings a fully automated court system designed to link courts, lawyers and citizens and handle all aspects of civil and criminal case management from beginning to end. ACS plans to consolidate SCT's justice solutions with its tax and financial solutions into a single product and services unit, Braswell said. The unit will be led by Mike Daniels, the former president of SCT's global government solutions unit, he said.Braswell said ACS hopes to generate substantial new business from SCT's justice solutions, citing a strong demand for technology among corrections departments, court systems and police departments in local governments."This is a high-profile, politically sensitive marketplace and, therefore, will get the necessary funding," he said.XXXSPLITXXX-