Lockheed Martin, ACS trade IT units

The swap of information technology units between Lockheed Martin Corp. and Affiliated Computer Services Inc. makes perfect sense for each company, according to industry analysts. The two firms announced Aug. 1 that Lockheed Martin would acquire ACS' federal government IT business, and ACS would acquire Lockheed Martin's commercial IT business."Each company is strengthening its core business and divesting business they each have less of a focus on," said Jerry Grossman, managing director at the investment banking firm Houlihan Lokey Howard & Zukin in McLean, Va.Most of Lockheed Martin's business is already in federal IT. ACS' business is growing most quickly in the commercial and state and local government markets.Bethesda, Md.-based Lockheed Martin will pay about $658 million for most of ACS' federal business, including $70 million payable pursuant to a five-year noncompete agreement. Dallas-based ACS will pay about $107 million for Lockheed Martin's commercial IT business. The net value of the deal is $551 million to ACS. The boards of directors of both companies approved the transactions. They are now subject to government approvals and should close in the fourth quarter of 2003, according to the companies.The units being swapped will find a better fit at their new homes, Grossman said. "If you are Lockheed Martin, you have $26 billion in sales and your corporate business is $300 million ? a little more than 1 percent of your business ? it's hard for that to get attention and priority," he said.ACS is doing well in the commercial and state local market and wants to do more of that, Grossman said.Revenue from ACS' divested federal business was approximately $700 million for its fiscal 2003, which ended June 30. The company's revenue for the year was $3.8 billion. Lockheed Martin's sales for its divested commercial IT business in 2002 were approximately $300 million, compared to total company sales of $26.6 billion. For fiscal 2003, ACS had 21 percent organic growth in its state and local government business, compared to 4 percent organic growth in its federal government business, according to Cynthia Houlton, an analyst with RBC Capital Markets in New York.ACS' federal business grew "well enough, but we couldn't grow in double digits like we're used to," said spokeswoman Lesley Pool. "Our take on the federal marketplace is that the players that will do best are the ones that are the very large providers and people with specific niche offerings. The in-betweeners [such as ACS] are too big for the little stuff, and not big enough for the huge contracts."Lockheed Martin will get increased capabilities in business process outsourcing and managed services, and expand its federal customer base in agencies such as the Federal Aviation Administration, NASA and the Defense Department. It also will gain about 5,800 ACS employees, 47 percent of whom have security clearances, the company said. "It's a fairly significant deal. There are not very many opportunities to acquire $600 million to $700 million of defense and government-related IT revenue," said John Allen, co-chief executive officer of the investment bank Windsor Group LLC in Reston, Va. "Not only that, but ACS' defense business has significant presence in the intelligence community, which is considered highly attractive today." ACS will gain four data centers across the United States, approximately 1,000 Lockheed Martin employees and clients in manufacturing, automotive, retail, financial services and communications. The two companies have done business previously. In 2001, ACS bought Lockheed Martin IMS, the firm's state and local unit, for $825 million in cash. Indeed, ACS "has been on our radar screen for quite some time," said Tom Jurkowsky, a Lockheed Martin spokesman. "ACS' business process outsourcing business was well-positioned for us. It really expands our capabilities in the managed services arena, and ACS was in a position to acquire our noncore commercial business. It was a good fit."ACS' state and local government business is not included in the sale to Lockheed Martin. ACS will also keep its contract with the Education Department to provide student loan processing services. The contract brings in annual revenue of about $172 million. It is being re-competed, and an award is expected in October or November. In addition, ACS will continue subcontracting on portions of its business sold to Lockheed Martin, according to ACS officials.Company officials and most analysts said they expect the two firms will continue making acquisitions."There are a couple of companies at the top tier making sure they sustain their positions in the IT space. Lockheed Martin is one of those, and they are doing it by making acquisitions and winning big contracts," Allen said.Lockheed Martin is "continually evaluating opportunities in the Defense Department, intelligence and civilian agency markets," Jurkowsky said. "When opportunities arise, if there is a good fit, we will try to acquire that company." ACS makes three to four acquisitions each year, and expects to continue that pace, Pool said. "We are always looking to grow our capabilities, our client list or our geographic reach," she said. Staff Writer Gail Repsher Emery can be reached at gemery@postnewsweektech.com.