EYE ON THE STATES

Mergers and acquisitions have become a hot growth strategy for some noteworthy companies in the state and local government market. Companies such as Affiliated Computer Services Inc., DynCorp and Maximus Inc. are keeping their mergers and acquisitions staffs quite busy these days as they move strategically to position their state and local businesses for growth in the years ahead.It would be easy to conclude these companies are motivated by opportunism and top-line sales growth; like all the others, they want to grow their market share and are not reluctant to take advantage of attractive merger and acquisition opportunities. But this conclusion would be a mistake, for below the surface, these companies are executing well-thought-out strategies that reflect a deep understanding of what it takes to succeed in the state and local market.One advantage these companies have is they are led by some of the most seasoned executives in the industry. These leaders have decades of first-hand experience in marketing to state and local governments. Unlike some of their federal counterparts, these companies are not simply executing a bigger-is-better growth strategy. The structure of the state and local market is such that there are plenty of opportunities for companies of all sizes. If getting bigger isn't the main motivation, what is? More so than most, these companies are very close to their customers. They understand what their customers need today and what they are willing to pay. But more importantly, they have particularly good insight into where their customers are headed.These companies are using mergers and acquisitions as a means of providing customers with even greater value, and doing so in a way their competitors will have a difficult time matching. One of the keys to providing state and local governments with greater value is to assemble under one roof most of the capabilities needed to address high-priority customer needs.The basis for competition in the state and local market is rapidly changing. The most attractive market opportunities, such as health care and electronic government, require deep and broad capabilities. Gone are the days when a market leader can get by with a narrow range of capabilities, such as application software and systems development.Now, companies need to bring the full range of capabilities including consulting, systems integration and business process management to the table and do so on a national, and perhaps global, basis. Mergers and acquisitions are enabling the companies to gain access to these hard-to-find capabilities. The companies are also acquiring customer relationships that are equally difficult to build. State and local buyers are usually quite loyal. They know how hard it is to find companies who truly understand state and local government and how officials in this market prefer to do business. Even if at times they are dissatisfied with their suppliers, these buyers can be reluctant to switch.This can make it difficult for a company to break into a new segment of the state and local market, even if it has all the right capabilities. It can take years to extend its market reach into a new geographical section of the country, into a new program area or even into a new market segment where larger contracts are. Mergers and acquisitions can be a way of speeding up this time-consuming and costly process. That's why companies will sometimes be willing to pay so much in good will when they finally settle on a price.Not all companies are in a position to execute a merger and acquisition strategy in the state and local market. First, they must have the financial capital for the transactions. Companies often allocate scarce capital to other purposes or other markets where they think the return will be higher.Second, the companies need to assimilate the acquisition or merged entity into their operations. This is trickier than it looks. For example, companies that build, integrate and deploy advanced Internet technologies for state and local governments often have little in common with those that excel in outsourcing. Similarly, those whose culture is more operational in nature often have a difficult time fitting in with those who focus on sales and customer relationships.Third, these companies must have a sound business strategy. They can't let the cart get in front of the horse. State and local customers will pay for innovation and additional customer benefits. But they won't pay a premium if they can't clearly see how the broader capabilities the company is offering will result in tangible benefits to their governments and their customers.