Computer Technology Associates, Armed With a Revamped Business, Will Try Going Public Next Year

Computer Technology Associates, Armed With a Revamped Business, Will Try Going Public Next Year

Staff Writer
By Richard McCaffery

Computer Technology Associates Inc. plans to take another shot at an initial public stock offering early next year to jump-start its acquisition strategy.

"We're looking to go public as soon as possible," said Tom Velez, CTA's chairman and chief executive officer. "It may be as early as the last quarter of this year, but it will probably be in the first quarter of next year."

The Bethesda, Md. company, whose primary customer has been the federal government, has spent the past 12 months reviving its infotech division and fighting its way back to profitability by refocusing its business. The company recently decided to use its orginal name, Computer Technology Associates, to reflect its new focus on information technology.

The systems integration and software company's revenue declined 14 percent since 1994 as it tried to compete in the fast growing satellite manufacturing business. The company sold its satellite division to Orbital Sciences Corp., Dulles, Va., for $45 million last August.

The sale cut CTA's work force from 1,500 to 800, focused the company on its core business and helped profit margins, company officials said.

For the first time in four years, CTA's revenues are growing. Velez expects revenues to hit $116 million in 1998, a 26 percent increase from $92 million in 1997.

CTA has not been profitable since 1995, but would have made $5.1 million last year excluding a one-time charge related to its space business and employee stock plan.

CTA also has reduced its reliance on the federal government during the past year by pushing into the state IT markets.

State revenues should double this year, jumping from $17 million in 1997 to $30 million in 1998, said Gregory Wagner, CTA's executive vice president and chief financial officer. "The state business is taking off," he said.

State and commercial business, which the company lumps together, will account for 35 percent of CTA's revenues this year, up from 18 percent last year, Wagner said. Federal business accounts for the remaining 65 percent.

Within two years, federal revenues will make up just 40 percent of the company's business, Wagner said.

CTA now has offices in 36 locations throughout the United States, almost double the number it had a year ago.

The employee-owned company was founded in 1979 in Englewood, Colo., by Velez and partner B.A. Claussen, who no longer works for CTA. The company's customers include the Navy, the Department of Energy, MCI Communications Corp., Washington, and Wells Fargo & Co., San Francisco.

The company tried to go public in late 1996, but its two-pronged strategy confused investors. CTA shelved plans to issue an IPO in October 1996 when it realized it would get less than $10 a share for its stock, Wagner told Washington Technology.

At the time, CTA was manufacturing a line of small satellites alongside its information technology services business. The company, which faced tough competition in the satellite business from established players such as Hughes Electronics Corp., El Segundo, Calif., was unable to convince investors the two businesses were a good mix.

Since then, the company's IT division has changed as well. Raymond McMillan, former president of CTA's Information Technology Services Co., is now a company consultant. He is still a member of the board of directors. Terry Piddington, McMillan's replacement, is president of CTA's Federal Information Systems Co.

"If they're doing 5 percent to 6 percent operating profit, that puts them in the right ballpark," said Thomas Meagher, equity analyst at Ferris, Baker, Watts, Inc., Baltimore.

Meagher said the company made a smart move selling its satellite business, but few players have been able to turn year 2000 work into other IT business, a key part of CTA's strategy.

"Generally speaking, the market is discounting that theory," Meagher said. "If year 2000 work is a big part of the company's revenues, that's going to be an obstacle."

Wagner estimates that $35 million, or 30 percent of the company's 1998 revenues will come from year 2000 contracts. But so far, CTA has not landed any additional IT contracts as a result of its year 2000 work. It is in discussions with several of its customers, Wagner said.

Despite success in other areas, CTA has struggled implementing its acquisition strategy. Over the last year, the company failed to complete two buys in part because it didn't have enough money to pay cash for the companies, Wagner said. He declined to disclose the companies' names.

Because of its lack of cash to complete the deals, as well as cultural issues, CTA is no longer pursuing either company, Wagner said.

But CTA officials still want to grow through acquisitions and are looking for small IT firms that can help the company gain an edge in the business software market, Wagner said.

The company is not looking to compete head on with the giants of enterprise resource planning (ERP), companies like PeopleSoft Inc., Pleasanton, Calif., and SAP AG, Waldorf, Germany, Wagner said.

Instead, it wants to fill a niche. Many organizations have a mix of ERP software from different vendors and need help knitting it together, Wagner said. There are also many companies, too small to use software made by one of the major vendors, that are looking for their own ERP solution.

CTA is eyeing IT and software companies that are developing these types of products, Wagner said. The company doesn't have any specific companies in its sights right now, but this should change once CTA goes public, Wagner said.

William Loomis of Legg Mason Inc., Baltimore, said CTA will have to find just the right acquisition to compete in this market. "It's highly competitive," he said.

Nearly all of the IT companies Loomis tracks offer some kind of ERP implementation services, he said.

For example, Cambridge Technology Partners, one of the fastest growing IT companies in business, offers ERP services, Loomis said. "It will be a challenge, but if they can position themselves in that market, it's fast growing and provides much better margins," he said.

State contracts have fueled much of CTA's recent growth. The company has contracts for year 2000 work in 14 states. Nine of the contracts were won in the last 12 months. Recent awards include California, Maryland, Connecticut, Pennsylvania, Georgia and Texas.

Computer Technology Associates Inc.
Business: systems integration, software development
Headquarters: Bethesda, Md.
Employees: 800
1997 Revenues: $92 million
1997 Business mix: 82 percent federal, 18 percent state and commercial

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