MARKET SHARE

Like many in the country that Tuesday morning, I arrived at work and watched in horror and disbelief as the terrorist attacks unfolded Sept. 11. Their effect on people and business around the world has been substantial, and it is not yet over.Like the rest of the economy, the commercial information technology services sector will suffer even more than it had previously, as CEO and consumer confidence are further shaken by the events and the continued uncertainty.On the other hand, in times of crisis and uncertainty, people look to and support a stronger government. Before the attacks, I was growing increasingly concerned about the impact of tighter budgets on the federal IT companies I follow, an issue that did not seem as important before the Congressional Budget Office issued its revised budget outlook in August.Now the budget has taken a back seat to the need to fight terrorism. This new war will be different in that there will be less need for stealth bombers and other traditional high-cost weapon systems, and more need for better information systems. The need for the latter goes beyond defense and law enforcement to agencies in charge of transportation (not only airlines, but also railroads, trucking and shipping), health care (preparing for biological and chemical attacks), finance (tracking money trails) and many others.Faster, redundant networks, more storage and increased information security also will be needed. While the government will likely grow, I believe most of the incremental growth will be outsourced to contractors. The fundamentals of the federal IT industry have been improving over the past decade and will likely improve further over the next decade, in my opinion.In the week following the terrorist attacks, BTG Inc. agreed to be acquired by Titan Corp. in a deal worth $13.35 per share, a 24 percent premium over BTG's close the day before the deal was announced. The valuation is 0.68 times enterprise value of the trailing 12-month's revenue of BTG. Also, the valuation is 34 times trailing earnings, and 21 times consensus estimated 2001 earnings per share.The structure will be 80 percent Titan stock and 20 percent cash. The deal was announced just as investor interest in the federal sector and valuations increased dramatically following the terrorist attacks and Congress' renewed commitment to increased defense spending. Of course, discussions of the acquisition were taking place long before these events occurred. With 67 percent of its revenue with defense agencies, BTG should add to Titan's capabilities in this new federal landscape. Titan has been a very active acquirer in the federal IT space. I have complimented the company in past columns on its strategy of using a highly valued stock, which investors bid higher because of prospects at the time for its commercial businesses, to acquire federal IT companies as opposed to commercial IT service firms.This strategy appears even smarter today. Titan acquired publicly traded Advanced Communications Systems Inc. more than 18 months ago in an all-stock transaction. Unfortunately for ACS shareholders who held on to their shares through the acquisition, Titan stock has fallen 50 percent since ACS was acquired, while many other federal IT companies' stock, such as BTG, CACI International Inc. and PEC Solutions, have hit new highs during that period.However, we believe the drop in Titan shares would likely have been much worse if ACS and other federal IT service companies were not previously acquired. Now Titan has $1.3 billion of federal revenue, much of it defense-related, making it a major player at a time when federal and defense service firms have more investor interest than they've had since the mid-1980s.