ACS' shopping spree

For Affiliated Computer Services Inc., the buying never stops. Fresh off three major acquisitions that company officials say make it the top integrator in the state and local market, ACS is looking to acquire companies that will boost its prosperous government health care business or bring new government customers, Mark King, ACS' chief operating officer, told . "To the extent that we can buy a company that can either deepen our presence in particular states or add additional service offerings, then we are definitely going to be all over that," King said. Dallas-based ACS routinely looks at 200 or 300 companies as possible acquisitions each year, and usually acquires five to 10 of them, he said. The company has made more than 50 acquisitions since it was founded in 1988.But ACS is not looking to acquire companies with intelligence and security solutions that are unreasonably priced following Sept. 11, King said. He said some companies with homeland security, cybersecurity or intelligence solutions believe they should have a 50 percent premium added to their worth following the terrorist attacks. "We will wait until they do have reasonable expectations," he said. Last year ACS grew by more than 40 percent when it purchased Lockheed Martin IMS of Washington for $825 million, the largest acquisition ever made by the company. The IMS purchase Aug. 24 was one of three acquisitions announced in a 30-day period that catapulted the company to the top tier of state and local government integrators. The IMS acquisition followed the June 25 purchase of Malvern, Pa.-based Systems and Computer Technology Corp.'s global government unit for $85 million. ACS also purchased Louisville, Ky.-based National Processing Inc.'s business process outsourcing services unit on July 12 for $43 million. Both were cash deals.Now with more than 36,000 employees, ACS expects to have total revenue of $3.1 billion in fiscal 2002, up from $2.1 billion in 2001. This projection includes $1.2 billion in state and local government business and $750 million in federal business, giving ACS almost $2 billion from its government units, King said.King said the new acquisitions will vault ACS past Electronic Data Systems Corp. of Plano, Texas, and IBM Corp. of Armonk, N.Y., as the top systems integrator in the state and local market. King said his company projects that EDS and IBM will earn $1.1 billion each in fiscal 2002, slightly less than ACS.Eileen Cassidy, an EDS spokeswoman, said about 20 percent of EDS' annual revenue of $19.2 billion comes from its government business, which is roughly $3.8 billion and rising. She said EDS does not break out its federal and state and local government revenues.IBM declined to provide figures related to its government revenue.ACS' acquisition strategy is playing well with investors. On Jan. 10, ACS' stock was selling at a 52-week high of more than $108 a share, more than double its 52-week low of $53.62.ACS is fielding "a Super Bowl caliber state and local team [and] has all of the necessary capabilities to propel itself to No. 1," said Tom Davies, a senior vice president at Current Analysis Inc., Sterling, Va.Davies attributes the company's success to a number of factors, including a deep market understanding, a proven track record, broad capabilities, experienced leadership and loyal customers in all vertical segments in which the company has a presence.The IMS acquisition went off without a hitch because of the level of scrutiny ACS exercises when it makes acquisitions, King said. "The amount of time to do an $800 million acquisition is about the same as a $100 million acquisition ... [although] you have to do a little more because of the risk," he said.Following the IMS acquisition, ACS put the IMS management team in charge of most of its state and local business. ACS transferred $250 million worth of its state and local business to the IMS management team so that the new unit of ACS "could have a more complete service offering," King said. John Brophy, former chief executive officer at IMS, now oversees all of ACS' state and local work except for health care. While a few people were lost from IMS through attrition, ACS was able to retain key staff partly by offering them stock options, King said. As for absorbing the SCT global government unit, "that was just a peer tuck into our existing business," he said. The IMS acquisition boosted ACS' presence in key states such as California, Florida and Texas, King said. The company is hiring additional staff for new projects in Georgia, North Carolina and Texas, said Harvey Braswell, president of ACS' government services.The 2001 acquisitions served only to further cement ACS' long-standing reputation as "a professional acquirer," said Robert Kipps, a senior vice president with Houlihan Lokey Howard & Zukin, McLean, Va."[ACS], like other active buyers such as General Electric, have institutionalized growth through acquisition," he said. "Their business unit leaders stay abreast of their marketplaces and competitors, and are aware who would fit well strategically with the firm." ACS will continue to face stiff competition from large integrators such as EDS, IBM and others that have broader state and local market coverage, industry observers said. However, King said ACS defeated large players, including EDS, for the $345 million Georgia Health Partnership Project last year, and that IMS had a better than 80 percent win rate on the projects for which it competed at the time of acquisition. Tom Meagher, vice president of equity research at BB&T Capital Markets, said ACS, which derives more than 60 percent of its government and commercial revenue from business process outsourcing, may find fewer outsourcing opportunities in the near term because of state budget shortfalls and the shift in focus to homeland security. Consequently, ACS should consider expanding its existing federal intelligence business, Meagher said. "They may not necessarily have the size or breadth of some companies [in that sector], but they certainly have a presence and will benefit from that," he said. These disadvantages are offset by the low number of competitors that occupy the playing field and the substantial profits that can be made from intelligence contracts, he said.Kipps, however, said budget shortfalls likely will push states to outsource more functions. He also questions whether ACS can quickly ramp up an intelligence business."While intelligence is generally a growth area for existing intelligence firms, the intelligence market is difficult to penetrate and ACS' Betac acquisition may not provide it the critical mass or sufficient clearances to fully tap near-term intelligence community opportunities," Kipps said.