High-Tech Companies Look for Buyers

This summer's acquisition fever underscores the region's maturing economy

Not unlike Hurricane Fran which battered the Southeast's economy, a whirlwind of acquisitions helped make the summer of 1996 a memorable one for Washington high-tech region.

One of the larger acquisitions was the purchase of I-Net Inc. of Bethesda, Md., by Wang Laboratories of Billerica, Mass. Cordant Inc. in Reston, Va., was sold to Tracor Inc. in Austin, Texas. UUnet Technologies Inc. of Fairfax, Va., was sold to MFS Communications Co. Inc. of Omaha, Neb., which was then sold to WorldCom Inc. of Jackson, Miss. Also, Intuit acquired Interactive Insurance Services of Alexandria, Va.

Many companies are still searching for buyers. Vienna, Va.-based PSINet Inc. announced earlier this year that it's looking for a buyer, and DynCorp of Reston, Va., has Bear Stearns exploring acquisition and merger opportunities. Analysts say any publicly held company is always on the lookout for a buyer.

"This trend is not uncommon to Washington," said Stephen Fuller, a regional economist and a professor of public policy at George Mason University in Fairfax, Va. "New firms that started during the recession are just now experiencing high growth."

Companies snapping up the infotech companies are trying to define their markets or solidify their presence in the market. For example, aerospace giant Tracor bought Cordant in an effort to strengthen its presence in the information technology market.

The region also has experienced its share of initial public offerings. Fuller says it's a business strategy that small entrepreneurs use to develop their business. "They want to cash out at a high price and make their money," said Fuller. "A lot of small companies don't have the capital resources to move forward."

IPOs and acquisitions are also common to technology companies because the lifespan of high-tech products is limited. Companies need the capital to spin off new products.

Doug Poretz, a principal for Douglas Poretz Ltd., an investor consulting firm in McLean, Va., says the trend of companies seeking capital for further development has just begun in the region.

"These kind of transactions are now a part of our daily lives," said Poretz. "As we become a business community, we're going to have a steady diet of IPOs and acquisitions."

PSINet Inc., an Internet access provider, and DynCorp, a $1 billion systems integrator, are two of the few companies in the area that have acknowledged plans to sell or spin off part of their business.

Eric Pollack, an analyst focusing on the Internet services industry with the Gartner Group in Stamford, Conn., says William Schrader, PSINet's founder and president, is holding out for the best buyer. His company is expected to pull in $90 million in revenue this year.

"At this point, PSINet is not worth a premium. The service offering is not as good, and they sold off their consumer division," said Pollack. "Schrader is trying to protect the company and do what's best for the company."

Pollack is expecting the company to be sold in the next two months. Merrill Lynch is looking for a buyer for the company, and according to Brian Muys, spokesman for PSINet, several interested buyers have surfaced. Muys said industry giants like Microsoft have shown interest, as well as some large telecom companies and systems integrators. However, Schrader has turned down offers.

"Schrader is not driven by financial needs," said Muys. "We are a very self-driven company."

Pollack's strongest guess on a buyer for PSINet is Bell Atlantic Corp., but he thinks there are many possibilities.

"An ideal match would be a company that will focus on small [to] medium-sized businesses," said Pollack. "Other possibilities are second-tier, long-distance carriers like Frontier Communications or LCI International."

Poretz says Schrader's strategy is to protect human assets and get the best return on the investment.

Ken Michlovitz, senior vice president of Cordant, says his company looked for a strategic buyer. The company wanted synergies between the companies and between the customer base and the employee base. "We didn't focus on cost synergies in an effort to save a few bucks," said Michlovitz.

The company started to pursue a buyer in February 1996. It identified 15 to 17 companies including Tracor. Company executives contacted most of the companies verbally, and approximately half of them made non-binding offers. After clarification of offers and negotiations, Cordant's board of directors took Tracor's offer in August 1996.

"The whole process was done in record time," said Michlovitz. "The acquisition lets us continue to pursue the federal systems integration marketplace."

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