EdgeMark Businesses to Part Ways
By Bob Starzynski
EdgeMark Systems Inc. is splitting its commercial and federal businesses into separate units and will eventually break them into independent companies, company officials said.
Lee Raesly and Raymond Tuchman, EdgeMark's top two officers, told Washington Technology last week that the commercial and federal businesses need to grow on their own. Once the two divisions are big enough, they will split.
"Last year, the federal [business] did extremely well, but commercial [sales] lagged," said Tuchman, the founder and chairman of the Silver Spring, Md.-based company. "If we separate the businesses, there is accountability and we know how well each organization is doing."
Tuchman, who started EdgeMark in 1992 as a commercial technology venture, is now heading the commercial division, focusing on such services as enterprise management systems, data management systems and financial applications.
Raesly, who joined EdgeMark as president a year after it was started, is pushing forward with the federal division.
Federal work, primarily the sale of Silicon Graphics' desktop workstations and servers through the General Services Administration schedule, accounted for most of EdgeMark's growth in the past two years. Federal sales increased from less than $500,000 in 1995 to $90 million last year. Including commercial work, EdgeMark logged sales of $105 million last year.
But because reselling technology equipment is becoming more and more of a commoditized business, EdgeMark is moving both divisions into the services business. As the company is finding out, commercial services and federal services require very different approaches.
The commercial business currently has 48 employees. Tuchman estimated that number will grow to 150 or 200 in the next year. Then, he said, the division will be ready for life on its own.
Meanwhile, "EdgeMark should do $150 million [in revenue] this year," he said. "That gives customers more comfort than a smaller company."
Tuchman and Raesly said the public market is a viable and probable option for both parts of EdgeMark's future business.
"We intend to do an initial public offering with the commercial business in the next three years," Tuchman said. Analysts predict the federal business, which is much larger and is quickly balancing reselling work with systems integration, could go public even sooner.
"There are several reasons why the divisions should be kept apart," said Paul Krieg, a reseller analyst with Legg Mason Inc. in Philadelphia. "One that immediately comes to mind is security clearance [necessary for doing work with the government]."
"They are very different business models and clearly have different cultures," Raesly said.
Commercial customers seeking professional services are drawn to a company that has several employees in a regional office. The federal business can get by with creating a one-person regional office to simply handle sales for a select group of customers, Tuchman said. And "on the commercial side, there is no allegiance, nothing forcing you and your customer together," he said.
On the federal side, EdgeMark is the exclusive reseller of Silicon Graphics' products.
If a government customer wants those products, they need to go to EdgeMark.
With their commercial business slipping despite phenomenal growth in federal sales last year, Raesly and Tuchman, the two primary owners of EdgeMark, mapped out a new plan at the beginning of this year. Both businesses would remain under the EdgeMark umbrella for this year but would keep separate financial books.
The corporate finance and information services departments are staying with the federal division. If the commercial business uses their services, they are billed in a line-item expense.
In keeping separate books on the two businesses, management is preparing for life apart.
Initially the company was going to split up earlier this year. But Raesly and Tuchman changed their minds, deciding to stay loosely linked until each division is more established.
Splitting apart is especially valuable from Wall Street's perspective as well.
"It may cost money to separate the books," Krieg said. "But that is how you realize shareholder value."
Typically, integrators are more highly valued by investors than resellers because they have higher profit margins - in the neighborhood of 40 to 50 percent, compared to 15 percent, respectively.
And commercial integrators tend to have higher valuations than government integrators.
"Private companies don't have to manage themselves for appearances," Krieg said. "Public companies do. They have to worry about this quarter and next quarter, not whatever interests them."