Davis mulls impact of mergers and acquisitions

The House Government Reform Committee plans to hold hearings about the effects of mergers and acquisitions among federal IT contractors, Rep. Tom Davis (R-Va.) said today.

The number of mergers and acquisitions among federal IT contractors has steadily increased in recent years, from 47 in 2001 to 64 in 2002 to 73 in 2003, according to investment bank Houlihan, Lokey, Howard & Zukin. The aggregate value of the deals grew from $3.8 billion in 2002 to $5.9 billion in 2003, according to the Los Angeles firm.

"We have a problem where these companies get eaten up and acquired," Davis said. "It helps the government to keep these companies [that are being bought] in play. We're going to do hearings."

Davis spoke today to information technology contractors and federal employees at FOSE, the government IT trade show produced by PostNewsweek Tech Media, which is being held this week at the Washington Convention Center. PostNewsweek Tech Media publishes Washington Technology.

Of all the mergers and acquisitions, only large companies with more than $150 million in annual revenue can usually compete for prime contracting jobs, Davis said. But set-aside contracts, those reserved typically for smaller companies, may not be the way to keep medium-size businesses in the government contracting mix, Davis said.

"I'm not a great fan of set asides," he said. "I think there is a strong place for small businesses. But when you limit competition, which is what set asides do, you increase costs [to the government]."

Davis said he doesn't favor creating new set-aside categories, such as a category for "medium" businesses. Currently, federal procurement regulations recognize businesses as either small or large, leaving businesses that grow beyond their small-business status to compete with all other firms, including billion-dollar behemoths.

Industry consolidation "is a long-term problem," he said. "I don't know the answer."