Analysts: GRC a Ripe Target for Takeover

Analysts: GRC a Ripe Target for Takeover

By Bob Starzynski
Staff Writer

Fresh from a yearlong refocusing effort, GRC International Inc. has worked to restore its tarnished image to become a prime target in the information technology industry's merger mania, analysts say.

"They have brought a lot more focus to their business in the past year. I would be surprised if they are not on anyone's radar screen," said Richard Leggett, an industry analyst with Friedman, Billings, Ramsey & Co. in Arlington, Va.

Two years ago, Vienna, Va.-based GRC was a high-flying defense contractor making serious moves into the telecommunications software business. That effort backfired and sent the stock into a tailspin on the New York Stock Exchange.

GRC's stock price started tumbling in the summer of 1996. Six months later, the stock had lost almost 90 percent of its value and was trading under $5 a share.

Jim Roth, GRC's president and chief executive officer

Roth sold several divergent commercial product lines, cut costs on other operations and turned his attention back to what the 37-year-old company does best: information technology contracting. The company had fiscal 1997 revenue of $118 million, 90 percent of which came from the Department of Defense.

"We made a mistake that left us in a dark tunnel," Roth said in an interview last week. "And we have come through that long, dark tunnel in the past year."

GRC's attention now is strictly on its core competency, the company has a record contract backlog in excess of $400 million, and its financials are showing promise, Roth said. But information technology analysts speculate Roth is sprucing up the company's bottom line to attract a buyer.

"They are a prime candidate for a buyout in the next year," said Bill Loomis, an IT analyst with Legg Mason Inc. in Baltimore. "And there are plenty of companies out there shopping around for a business with their [expertise]." Large defense companies and information technology contractors would be the most likely shoppers, he said.

"Anybody who wants a foothold in the intelligence market could be a potential buyer [of GRC]," said Tom Meagher, an analyst with Ferris, Baker Watts Inc. in Baltimore. Meagher speculated that such companies as Litton Industries Inc. of Woodland Hills, Calif., CACI International Inc. of Arlington, Va., and Nichols Research Corp. of Huntsville, Ala., could be shopping for such a company.

Like almost any public company CEO responsible for shareholder return on investment, Roth said, he must entertain any serious offers. But Roth said he is not actively trying to sell the company.

Instead, he executed a strategy to:

• Expand the company's business base with the Department of Defense.

• Expand by providing IT services for civilian government agencies, adding to recent contracts with the departments of Commerce and State.

• Expand into the commercial services market, where most other government IT players have turned their attention in the past two years.

"We are going back to our roots with the DoD focus while applying what we do there to other markets," Roth said.

Although GRC got burned the last time it entered the commercial market, next time will be different if Roth's strategy prevails.

Last time, the company turned to the commercial products market as decreasing defense budgets had most of the companies that contracted with the Department of Defense running scared. Unlike tank or ship manufacturers, GRC's business with the government was not threatened because it is an information technology contractor, Roth said. Its move to commercial products was because of growth prospects Roth saw in the telecommunications field.

By early 1996, GRC had developed several commercial products - including telecommunications software for designing wide area networks, materials testing equipment, environmental software and electronic security products - that were ready for sale. But sales did not roll in. "We realized that the market was not ready for what we had," Roth said. "The market wouldn't be ready for us for a long time."

GRC was left holding a hot potato. The company had taken on tens of millions of dollars in long-term debt to finance its products and had built up in-house teams for making and selling the products.

Plus, as one former company manager put it, "the company was virtually ignoring its defense business to get its products to market. Some defense customers did not take too kindly to that."

The company's revenue slipped to $117 million in 1996 from $133 million in 1995, while a $5 million profit turned to an $18 million loss. In the meantime, GRC's stock price had taken off on the telecommunications prospects from under $15 a share in mid 1995 to almost $45 a share a year later. "What was simply hype got even more hyped," said the former manager.

But the mistake of going into the commercial products market without the help of experienced commercial partners and having products with few buyers took a heavy toll. "The hype of their telecom business sent their stock on a long, ugly ride," Meagher said.

The stock has rebounded only slightly, closing Feb. 13 at $6.69.

To clean up the mess, Roth sold the commercial product lines to several companies in the past year, including Advanced Concepts Inc. of Columbia, Md., and Sotas Inc. of Rockville, Md. Money from those sales have reduced GRC's debt to $26 million and could generate royalties for the company over the next 10 years.

GRC officials said the company can build its commercial IT business if it doesn't turn its back on the government work. Fran Durante, who is heading the commercial professional services operation for the company, wants to build the commercial portion of GRC's pie to 10 percent of total revenue in the next couple years.

"We're looking at several vertical markets, including financial services, industrial manufacturing, telecommunications and health care," he said.

Roth said that he expects revenue growth in 1998 to be under 10 percent. (It is flat in its first two fiscal quarters ended Dec. 31.) But he favors steady gradual growth rather than the growth through acquisition that has bolstered many of the company's competitors, especially BTG Inc. in Fairfax, Va.

"[GRC] has good customer retention and a good backlog," said Leggett.

Another former employee, who spoke on background, was more to the point: "GRC should put on its best suit and entertain offers."