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While there has been a significant amount of consolidation in the federal markets over the past few years, there has been relatively little consolidation among the commercial information technology services firms. I believe this is changing, and we will see much more consolidation in the commercial IT services industry over the next few years. Consolidation in the federal marketplace has been driven by several forces, but the dominant one is the relatively low internal growth of the federal market (that is, growth without acquisitions). Capital providers require a return on their investment, with public equity investors having the greatest requirements. In a no-growth to slow-growth business with relatively low profit margins, the solution often is with acquisitions. Of course, these acquisitions need to be smart ones consistent with the company's overall growth strategies and not just acquisitions of contracts, revenue and professional talent. While growth opportunities and market characteristics (such as ease of acquisitions and profitability) are better in the federal space than we have seen in a decade, market growth still remains in the low-single digits, prompting continued high levels of mergers and acquisitions.In the commercial IT services market, there have been several trends over the years that made large mergers and acquisitions less attractive. The rush of IT spending related to the year 2000 computer problem from the mid-'90s to 1999, both replacing and fixing information systems, resulted in such high internal growth for companies that acquisitions were less important to the commercial companies' strategy. Following the Y2K rush in late 1998, the Internet boom really began to pick up steam. Few of the strong Y2K players (such as Keane Inc., Computer Horizons Corp. and many other midsized IT service firms) made the transition to Internet services, at least in a way that would have prevented their revenues from falling. At this point, consolidation among the previously Y2K-focused companies did not materialize, as potential buyers, from IBM Corp. to Computer Sciences Corp., were focused on building their e-business service capability and were not interested in adding additional traditional IT services capability. Following the Internet bust of 2000 and the sharp slowdown in traditional IT spending because of the slowing economy, internal growth has slowed.Unlike other slowdowns in recent history, there is no major catalyst for IT spending on the horizon: no Y2K, no Internet. The catalyst is expected to be a rebound in general business expansion, and prospects for a rebounding economy now seem to be pushed out to mid-2002. Companies in the commercial IT services space are starting to realize that growth in IT spending will likely be slow for some time. Meanwhile, shareholders are growing restless and are pressuring companies to find growth opportunities. Another factor that we believe will drive consolidation in the commercial industry is the health of balance sheets in the space. Many of the public IT service firms had stock offerings over the past few years, resulting in no debt and plenty of cash, in what should be a positive cash-flow business. Even the larger IT service firms, such as Electronic Data Systems Corp., CSC and Affiliated Computer Services Inc., have been able to access the capital markets this year, despite a tough technology market, not to mention a tough overall stock market. Also, there is a new group of large, motivated buyers in the industry, including Compaq Computer Corp., Hewlett-Packard Co. and other hardware and software firms looking to boost their IT services capabilities. In fact, at a recent analyst meeting, Compaq indicated it wants its services unit, Compaq Global Services, to grow from 23 percent of Compaq revenue in the second quarter of 2001 (about $1.9 billion) to a third of revenue.Compaq's emphasis on services confirms the trend of larger technology firms' expanding their services offering (following the success of IBM Global Services), and seeking to increase their client penetration by leveraging their installed base and providing a single point of contact. In addition to larger hardware companies becoming more aggressive on acquisitions, the midsized companies want to be more aggressive on acquisitions as well, with the most recent example being Keane's proposed acquisition of Metro Information Systems. Keane recently announced it would acquire Metro Information Services Inc. in a $135 million all-stock transaction, paying a 139 percent premium over Metro's prior day close.On a price-to-earnings basis, Keane is paying 29 times the consensus 2002 earnings-per-share estimate of 31 cents and, on an enterprise value basis, Keane is paying approximately 0.7 times last quarter annualized revenue of $279 million for Metro.Although Metro is a staffing company, a business Keane had been trying to get away from over the last several years, it acquired Metro primarily to cross-sell its services, especially its application development and maintenance services, to Metro's 230-plus new clients inherited in the acquisition. Keane also believes Metro's employee base will be well-suited for application outsourcing projects, which now represent over half of Keane's revenue.We also expect the commercial e-business companies to consolidate, though with less fanfare, given their relatively small market capitalizations. For example, two past leaders in this space, Scient Corp. and iXL Enterprises Inc., both of which have been experiencing dramatic sequential revenue declines, recently announced they would merge, only to have their combined market capitalization decline from $134 million to $66 million in the weeks following the announcement. I believe the increase in merger and acquisition activity that we are seeing in the commercial IT services industry, however, will likely last only as long as internal growth opportunities are hard to find.