Three Companies Find Sweet Spot in Public Market

Three Companies Find Sweet Spot in Public Market

By Richard McCaffery
Staff Writer

When a blue-chip technology company offered David Mastran $150 million for the government services company he founded in 1975, Mastran decided to find out how much it was worth on Wall Street.

That decision has paid off in a big way.

Less than a year after an initial public stock offering, McLean, Va.-based Maximus Inc. has a market value of about $500 million. The company's stock price has nearly doubled, and total revenues rose to $128 million in 1997 from $103 million in 1996, an increase of 24 percent.

"The goal is to consolidate our niche market. Anybody that's small and looks good, we're going to acquire." - David Mastran

"The growth is being driven by an increase in outsourcing from the states," said Mastran, chief executive officer of Maximus, which now has more than 2,500 employees. The company's stock closed April 17 at $29.25 a share, up from $16 last June.

Maximus is not the only Washington-area information technology, training and consulting company profiting from public offerings last June. RWD Technologies Inc., Columbia, Md., and Advanced Communication Systems Inc., Fairfax, Va., have seen their stock prices soar in the past 10 months.

"I've been very pleased with the market's response to our efforts," said George Robinson, president of ACS. The company, which provides systems integration and satellite communication services primarily to the Department of Defense, has seen its stock price jump 78 percent, from $7.50 last June to $13.50 April 17. ACS has grown from about 325 employees to about 900 since its initial public offering.

RWD Technologies, which provides systems integration services and training solely to the commercial sector, has also seen impressive returns. The stock closed at $25.62 April 17, a 93 percent increase from last June's price of $13 a share.

"In general, the underlying fundamentals of the industry" are driving growth, said Thomas Meagher, an equity analyst at Ferris Baker Watts, McLean, Va. The year 2000 issue and outsourcing trends in the government are keeping integrators busy, and "demand is outpacing the supply," Meagher said.

Like many other government contractors, ACS management decided that size matters when it comes to winning IT work. The company felt the squeeze of consolidation and moved quickly to expand through acquisitions. "It's acquire or be acquired," said Robinson, who secured three acquisitions in the past 10 months.

Maximus, which helps federal, state and local governments design, integrate and manage their health and human services programs, has spent about $51 million on acquisitions since last June.

"The goal is to consolidate our niche market," Mastran said. "It started out as a defensive move. Anybody that's small and looks promising, we're going to acquire."

About 25 percent of Maximus' 1997 revenues, or about $50 million, came from information technology services, Mastran said. Because of the need for these services, Maximus is hungry to acquire information technology companies.

Consolidation is certainly shaking the industry, said Meagher. "It's buy or die."

Acquisition reform increased the number of competitors in the federal market, luring large companies that did not compete for government contracts years ago, he said. "Dell and Compaq are selling literally hundreds of millions of dollars of equipment to the federal market because the [General Services Administration] schedule is easier to use."

For Mastran and Maximus, having an IT component "is a prerequisite" for winning large state and local contracts that involve systems used by huge numbers of people. In the last 12 months, Maximus has won big contracts with California, Michigan, Texas and Wisconsin.

For example, Maximus integrated and now runs California's MediCal program, which has 3.6 million clients and works with 160 health maintenance organizations. The three-year outsourcing contract, which has options for two additional years, is worth about $100 million, Mastran said.

Last month, Maximus completed its $19.3 million purchase of Spectrum Consulting Group Inc., a San Antonio-based information technology company. It also entered into an agreement to buy David M. Griffith & Associates Ltd. of Northbrook, Ill., a privately held firm that offers government accounting, human resources and fleet management services. The deal is worth about $31.5 million.

By comparison, ACS has spent about $30 million on acquisitions since its offering, but "that's just the start," said Robinson. "We're at the point now where we have to grow or be consolidated. Those are the choices."

The company generated about $52 million in revenue last year, up 63 percent from $32 million in 1996. But Robinson expects that revenue figure to hit $250 million by 2001.

That growth can be traced to systems integration efforts and satellite services contracts with the Defense Department.

For instance, the company has designed satellite-based networks since 1996 to support the installation of pay telephones on naval ships.

The company must grow to compete, Robinson said.

"Some of our competitors have thousands of employees and billions in revenues," he said.

Information technology accounted for 26 percent or $22.4 million of the company's 1997 revenues, according to Ronald Holtz, RWD's chief financial officer.

"RWD is growing fast because we have the kind of services people really need," said Holtz, whose company also offers a range of employee training services.

Those services range from projects that help people get the most out of desktop computers to programs that train assembly line workers in automobile plants.

Its biggest customer for the past five years has been Chrysler Corp., Auburn Hills, Mich. The automobile giant accounted for 28 percent of RWD's total revenue in 1997, down from 35 percent in 1993 because the company has expanded its customer base.

RWD designed and installed automobile diagnostic systems at 5,000 dealerships nationwide. Like a bar-code scanner at the grocery store, the system allows mechanics to access the maintenance history of all Chrysler cars and gain access to information on parts and repair techniques.

RWD, which has 791 employees, is also interested in acquisitions. "We're out there looking," Holtz said, though it is not the reason it went public.

"We have broad-based employee ownership and wanted to create liquidity for employee options," Holtz said.