TRW Sets Hearty Growth, Acquisition Goals

TRW Sets Hearty Growth, Acquisition Goals

By Nick Wakeman

Philip Odeen

The melding of TRW's Systems Integration Group with BDM International Inc. has created an IT heavyweight that generates $3 billion in revenues from the federal, state and local, and commercial markets. TRW purchased McLean, Va.-based BDM for $1 billion last December.

TRW's Systems & Information Technology Group should be pulling in $6 billion annually by 2002, said Philip Odeen, executive vice president and general manager of the new unit.

"We want to see a lot of growth," said Odeen, who expects new state and local business and commercial work to lead that expansion.

TRW, a global manufacturing and service company that employees 79,000 people, has focused on high-technology and engineering products for the automotive and space and defense markets. Indeed, the automotive sector accounted for roughly $6 billion to $7 billion of its 1996 revenues of $10 billion.

That focus will be refined as the purchase of BDM opens new markets in the civil sector and positions TRW to offer new services, company executives said.

But the $23 billion annual federal market, with its lucrative integration and outsourcing projects, will remain the bedrock of the unit's revenues, said Odeen, former president and chief executive of BDM.

The company's BDM purchase boosted overall revenues to $11 billion in 1997 and makes TRW the fifth largest federal systems integrator, company officials said.

Acquisitions also are part of TRW's growth strategy, especially on the commercial and state and local fronts, Odeen said. The company's top priority is to buy firms in the integrated supply chain area.

Between now and July, TRW officials will develop a long-term strategy that includes acquisitions, Odeen said.

Earlier this week, TRW credited the BDM acquisition for helping lift first quarter 1998 revenues by 16 percent compared to one year ago.

In its latest financial report, TRW reported overall first quarter revenues of $3.1 billion, up from last year's $2.7 billion.

First-quarter profits rose 8.5 percent to $129.4 million from the same period one year ago led by record sales and cost-cutting measures after the acquisition of BDM.

While guiding the company on its growth path, Odeen also has the daunting task of fitting together the pieces of BDM and TRW. Turnover and attrition are issues that loom when two companies merge but conflicts at TRW appear to be minimal, analysts said.

"The most critical issue is how do you blend the pieces," said Thomas Meagher, an analyst with the investment banking firm, Ferris, Baker Watts of Washington.

A management team led by Jack Distaso, a TRW vice president, dumped an earlier idea of operating TRW's IT unit and BDM as separate entities, Odeen said.

"We recognized it didn't make sense to run them in parallel," Odeen said. "There are a lot of overlapping skills and experiences, so we were going to be tripping over one another and probably competing."

The best approach is to move quickly, said Robert Dornan, senior vice president of Federal Sources Inc., a McLean, Va.-based market research company.

"Stretching [integration] out just lets things fester," Dornan said. "By getting on with it, people can worry about doing business rather than jockeying for position in the company."

Howard Rubel, an analyst with the investment company Goldman Sachs of New York, noted: "There doesn't appear to be a lot of infighting going on."

While the new unit will not be completely integrated for another year, its overall structure has been set. Plans call for the unit to be divided by customer sets, similar to the way BDM had been structured, Odeen said.

The division, which will be headquartered in Fairfax, Va., has four market areas: defense, public sector, intelligence and commercial. TRW's previous structure was more along geographical lines, Odeen said.

The combined company will be a formidable force in the federal market, said William Loomis, an analyst with Legg Mason Inc. in Baltimore.

"They are as well positioned as anyone," he said. "There should be no real barriers to excelling."

The combined capabilities of BDM and TRW position the company to be a dominant player in growing markets such as defense logistics, according to Odeen. BDM traditionally has been a strong provider with the Army and the defense agencies, while TRW has several major logistics projects with the Air Force.

"So put them together, and we've got a much broader coverage of the DoD logistics marketplace and a lot more capabilities," Odeen said.

The $3 billion General Services Administration contract BDM won last fall to provide telecommunications services to the government will be bolstered by the combined company's assets, Odeen said. The company is competing with five others for business under the Technical Management Support Services contract.

"TRW has a lot more telecom capabilities than BDM did," he said.

Outsourcing is another white-hot market the company will pursue, he said. The company is especially interested in the outsourcing of logistics services and maintenance and support of systems, Odeen said.

The federal outsourcing market is expected to be more than $2.6 billion by 2002, with an annual growth rate of about 7.4 percent, according to Input, a Vienna, Va.-based market research company.

Added to TRW's federal mix are the combined company's offerings in the state and local marketplace. Those markets are complementary, especially in areas such as law enforcement and health and human services.

A broader base of company experience was a major reason BDM began looking for a buyer in September, Odeen said.

Earlier in 1997, BDM lost a contract to a larger competitor, which Odeen declined to name, because the competitor had more references in its proposal, he said.

"We thought [our proposal] was a slam dunk," he said. "When we lost, we were taken aback."

The initial response was to step up its own acquisition activities to get bigger, but then in June, BDM's stock tumbled 25 percent because of problems with a state welfare system project.

"That hurt our ability to make acquisitions," he said. A lower stock price also made BDM a tempting target for a takeover.

"When the stock dipped, several other larger companies began to look at us," Odeen said. "We realized we were very vulnerable."

BDM decided to find a buyer rather than risk an acquisition by a company that would not be a good fit, he said.

TRW's overall culture, its focus on customer service and the way it treated its employees made it a good catch as a buyer, Odeen said. "I think they felt the same way about us."