Veritas, Pearson join forces

In the last four years, Pearson Government Solutions Inc. has more than quadrupled sales from $100 million to $550 million. As a division of Pearson plc, a publishing, education and professional services company, Pearson Government Services grew aggressively through large federal contract wins.

But that was still short of the company's goal of $1 billion in annual revenue. Taking that last step, Mac Curtis, CEO of Pearson Government Services in Arlington, Va., and the principals at Pearson plc in London, decided a year ago, would take the right buyer.

"When we looked at what it takes to make it grow: an investment in people, systems, technology and acquisitions, we came to the conclusion ... there's probably a better home for Pearson Government Solutions," Curtis said.

Veritas Capital Fund LPof New York, a private equity firm that has been acquiring government outsourcing companies for the last few years, took on the challenge. The firm, launched in 1992, will pay $600 million in cash and stock, and Pearson plc will retain a minority interest in Pearson Government Services. The company is expected to finalize the transaction this month, which will include a name change. All 5,500 Pearson employees will keep their jobs and Curtis will continue to run the operation.

"When you think about what Veritas has invested in, it's the whole Pearson Government Solutions business and it's all about performance and continuing on the growth path," Curtis said. "We need everybody to do their jobs."

As with its previous acquisitions, which have included McNeil Technologies Inc. and DynCorp International Inc., Veritas will meet with the Pearson management team to map out a strategy for hitting $1 billion in revenue. The company will get a goal to win one major contract in the next two years. Robert McKeon, founder and president of Veritas Capital said the contract will be a stretch for the company, one that they never would have planned on going after in the past.

But the strategy worked with McNeil and DynCorp, which Veritas added to its portfolio within the last three years. The two companies joined forces last year to win the $4.6 billion Army Linguistic Services contract, a goal Veritas set for the companies when it acquired them.

"It amazes them all when ? they win these things," McKeon said.

The expectation is that Pearson Government Services will reach $1 billion by mid 2009 through acquisitions and contract wins focused on health care and business process outsourcing for federal agencies, McKeon said. Pearson Government Services might go public in that same time frame, he added.

Pearson Government Solutions has carved out its niche designing and building systems that provide information, benefits and services to customers of federal agencies and some international entities. The company recently announced an $800 million Education Department contract to build an information delivery system for its financial aid programs. The Centers for Medicare and Medicaid Services also is a major customer for the company, hiring it to build and maintain its 1-800-Medicare information system.

"We have a clear expertise that helps government deliver information and services to the people," Curtis said.

While building a strong reputation as an owner of defense companies such as Integrated Defense Technologies Inc. and Vertex Aerospace Inc., Veritas also has been carving out a significant niche in government outsourcing companies. It primarily looks for companies that have a backlog of work, strong relationships with customers and sound management teams.

"It's clear that private companies that do this type of work, work better, cheaper and faster than the government," McKeon said. "It's capitalism at work."

Veritas will continue making government outsourcing acquisitions through 2007; several are slated for the first six months of the year. Some may be larger than the Pearson Government Services deal, McKeon said.

Investors such as Veritas have been attracted to government outsourcing companies because of their high returns in the market, analysts said.

"Since 9/11, the market has changed dramatically for these types of companies," said Paul Serotkin, president of investment bank Minuteman Ventures LLC of Lexington, Mass. "Once you build an expertise in the sector, it's relatively easy to continue it."

Interest from financial players like Veritas and cash flow coming from large prime contractors will continue to fuel the flurry of merger and acquisition activity in 2007, according to analysts.

"The large primes are throwing off in excess of $6 billion in free cash flow in 2006," said Bill Farmer, co-president and head of government IT and the technical services investment banking group at Jefferies Quarterdeck of Washington. "And the street is looking for them to redeploy that capital to help grow the business," he added.

Tania Anderson is a freelance writer based in Arlington, Va.