AT&T Gains Government Traction With GRC

AT&T Gains Government Traction With GRC

Mary Jane McKeever

By Nick Wakeman

AT&T Corp.'s planned purchase of midsize systems integrator GRC International Inc. signals that the telecom giant is angling for acquisitions and making good on a vow to be an aggressive player in the federal market, analysts said.

The nation's No. 1 long-distance telephone carrier grabbed Vienna, Va.-based GRC to bolster its professional services capabilities and pursue more outsourcing, information assurance and systems integration work from the government, said Mary Jane McKeever, senior vice president for AT&T Government Markets

The trend in government is toward outsourcing and managed solutions, McKeever told Washington Technology. "There is a lot of consolidation going on [in the federal market] and we wanted to remain competitive," she said.

The federal market for outsourcing is expected to grow from $2.2 billion in 1998 to $3.2 billion in 2003, according to the market research firm Input Inc. of Vienna, Va.

AT&T has "quietly been knocking on doors for awhile," one industry source said last week. Other industry executives and analysts agreed that the Basking Ridge, N.J.-based telecom giant, which recorded revenue of $64 billion in 1999, would make more such deals in the coming months.

"We do not speculate on acquisitions," said McKeever, who declined to disclose revenue figures for AT&T Government, which has about 2,000 employees and serves both civilian and defense agencies.

Because this deal is small, others must follow for this one to make strategic sense, said Jon Kutler, president of the investment banking firm Quarterdeck Investment Partners of Los Angeles.

"GRC just isn't large enough or dominant enough to make a significant difference to AT&T," he said. Without further IT acquisitions, GRC quickly will get lost, he said.

"This deal tells us that the attention being paid to the government market has intensified somewhat among firms not as active in that market as they'd like to be," said Jerry Grossman, managing director of the investment banking firm, Houlihan Lokey Howard & Zukin of McLean, Va.

Under the $221 million cash deal, which was announced Feb. 14 and is expected to close in about two months, GRC will become part of AT&T Government Markets, which is a unit of AT&T Business Services. That unit oversees AT&T's commercial voice and data services business. AT&T Business Services accounted for $25 billion of AT&T's total 1999 revenue.

With more than 90 percent of GRC's revenue coming from the Department of Defense, AT&T gets a $200-million-a-year integrator with capabilities in systems analysis and design, communications engineering, modeling and simulation, data base planning and design and network services.

AT&T primarily provides long-distance telecommunications services to government agencies through contracts with the Defense Department and civilian agencies. The company also won in May 1999 the first three Metropolitan Area Acquisition contracts for local telecommunications services in Chicago, New York and San Francisco worth about $750 million over eight years.

Other government wins include the General Services Administration's Access Certificates for Electronic Services contract, a $100 million contract awarded in October. Agencies will use the contract to buy digital certificate services to enable electronic government applications.

The telecom company also provides professional services, such as network management, local area and wide area network integration and onsite telecommunications infrastructure support to Defense Department customers.

Gary Denman, GRC president and chief executive, said being part of AT&T will help his company play a role on larger networking and communications outsourcing projects that the government is considering, such as the $10 billion Navy-Marine Corps Intranet contract. AT&T is on a team being led by IBM Corp., Armonk, N.Y., that is pursuing the lucrative deal.

"There are lot of things happening around the connected world," Denman said.

While McKeever was reluctant to detail plans for GRC, Larry Spilman, vice president of AT&T Government Markets said in an interview last year with Washington Technology that AT&T wanted to build its professional services might as a way to get double-digit growth in the government market.

But while the deal offers some evidence of the direction AT&T is taking to position itself competitively in the government arena, several analysts and executives were puzzled by the move.

"There is not a great tradition of phone companies and systems integrators merging," said Warren Suss, a telecommunications consultant and analyst in Jenkintown, Pa. MCI WorldCom sold off its Systemshouse unit to Electronic Data Systems Corp. of Plano, Texas, in February 1999 after struggling with where the systems integration unit fit, he said.

"The cultures are very different," he said.

But McKeever said the cultures and fit of the two companies will not be a problem. "We have a very entrepreneurial team, and we have a sizable number of professional services people in the government unit," she said.

Meanwhile, competitor MCI now reportedly is considering joint ventures with a consultant firm or systems integrator to provider software and other IT services to customers. The joint ventures would be similar to what Qwest Communications Inc., Denver, formed with KPMG LLC of New York.

Sprint Communications Corp. of Westwood, Kan., also has struggled with fielding a systems integration unit, a telecom executive said.

Denman said AT&T officials approached his company several months ago with the buyout offer. "This is a very good deal for our shareholders, and it is a very good fit between the two companies," Denman said.

AT&T is offering $15 a share for GRC stock. GRC's stock closed Feb. 14 at $14.75 a share on the New York Stock Exchange. AT&T's stock closed at $48.38. GRC, which was founded in 1961 and went public in 1967, has about 1,200 employees.

Denman said that while GRC was doing its own acquisitions ? it closed a $27 million deal in September for Management Consulting and Research Inc., a McLean, Va.-based provider of cost analysis, financial management and program management to the Air Force ? there was concern that GRC could not keep up with the consolidation in the government IT market.

But "this was not something we were forced to do," he said. "We decided it was an interesting opportunity."

"What this gives AT&T is a base to start acquiring other firms," said Thomas Meagher, managing director of the investment banking firm BB&T Scott and Stringfellow of Vienna, Va.

The deal signals that AT&T is looking to diversify its government work, said William Loomis, a managing director at the investment banking firm Legg Mason Wood Walker Inc., Baltimore. "It looks like they want to move into the systems and desktop side, which is a different market," he said.

For GRC, the acquisition is the culmination of a two-year comeback that began when Denman took the reins in March 1998. The company's profit margins have improved steadily from 3.9 percent in 1997 to 7.5 percent in its most recent quarter, which ended Dec. 31.

"They have done a great job turning it around," Loomis said. Meagher agreed, calling it "a superb job."

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