SAIC's Great Hunger

The integrator adds Bellcore to its plate of potential acquisitions

In a move certain to blur the lines between traditional enterprise integrators and their telecom partners, Science Applications International Corp. is advancing its acquisition talks with Bellcore, a $1 billion supplier of telecommunications research and consulting services.

The talks come one month after the integrator revealed it had signed a letter of intent to merge with Aerospace Corp., and are now energizing a daring buyout strategy destined to open a new chapter for systems integrators.

Spurred by slowed defense spending, SAIC has been piloting an aggressive acquisition spree and now appears poised to snatch up both Bellcore's expertise in telecommunication services and Aerospace's expertise in satellite technology.

The combination of all three is greater than their separate strengths, especially for Bell Communications Research Corp., widely known as Bellcore, and Aerospace Corp., which have both been hit hard the past few years by competition and spending cuts.

If the buyouts succeed, SAIC will pioneer the expected transformation of traditional system integrators into the one-stop superstores for information economy and quickly reduce the 90 percent federal share of its $2.2 billion revenues.

For several years, executives from computer and telecommunications companies have been predicting the merger of their two industries, with integrators doing the matchmaking. "There's a huge area between the two called integration where all the activity is going to occur," said John Whiteside, general manager, IBM Global Network, at a recent conference in Washington sponsored by The Wall Street Journal. "What's emerging is a new form of integrator... that bridges telecom and computers," he said.

"With the convergence of the computer and telephone networks, telecom has become a meaningful part of any form of information system, William Roper, SAIC's chief financial officer said Sept. 19. "As a major integrator, you have to have that base level expertise in telecom," said Roper, who refused to comment on the integrator's talks with Bellcore .

SAIC is not alone. IBM Corp.'s Global Services, Armonk, N.Y., and Computer Sciences Corp., El Segundo, Calif., have also been taking a look at Bellcore, company executives said. On the other hand, telecommunication companies, such as AT&T and MCI Communications Corp., are building systems-integration businesses atop their long-standing communications expertise.

In April, CSC purchased the Austin, Texas-based Continuum Co. for $1.5 billion. The buyout gave CSC an entry into the banking, insurance and financial services sector, which is expected to invest heavily in infotech during the next few years.

"CSC is further down the curve then we are. They have done a good job and have done some good acquisitions [but] are doing some things that they do that wouldn't work for us," said Roper.

SAIC has in the past bought a number of small management-consulting firms, but as yet does not compete against CSC Index, CSC's consulting arm, formed after the integrator's acquisition of Index Group Inc. in 1988.

"We do intend to be a player in [the telecom] marketplace, while keeping in mind some of the biggest companies in the world, such as AT&T and [London-based] British Telecom, compete here," said Roper, indicating the integrator's telecom plans remain largely tied to its integration business.

In the telecommunications sector "there are some wonderful growth dynamics projected well into the next century.... I would not describe us as a major player in this market today but we have some meaningful contracts in the area," Roper said.

And SAIC, which holds a lot of cash and little debt, may not be finished shopping yet. Asked whether SAIC would buy Reston, Va.-based DynCorp, put up for sale in August, Roper replied, "We think a lot of them and the business that they built."

"Our acquisition strategy has increased in recent years," said Roper. SAIC examined roughly 150 companies in 1995, prior to buying roughly 10 companies, he said. "You look at a lot of possibilities to wind up with a relatively small number of transactions," he said.

Morristown, N.J.-based Bellcore, had $1 billion in revenues in 1995 from its work in the phone and integration business. But its future has been clouded by growing competition among the Baby Bell regional phone companies that had created Bellcore.

Because of that past, SAIC's purchase of Bellcore would give a company a wealth of business in the Bells, which are now going through major restructurings, mergers and investment binges following the landmark Telecommunications Act of 1996, signed into law by President Clinton in February. For example, Bellcore is currently merging the computer systems of Nynex and Bell Atlantic, as well as figuring out how Internet offerings and ISDN access will need to work with current systems.

Among Bellcore's accomplishments is building the 800-number network, and designing the phone network, phone exchanges and fiber-optic grids.

In 1995, Bellcore formed a program called "Rapid Apps," to provide rapid service to its clients. "In our industry -- in cable TV, wireless, Internet -- people need shorter design cycles," said Carl Silva, executive director of business development at Bellcore. While Silva said he could not talk about the potential acquisition, he did say Bellcore is moving into new markets, including Web-based payment systems.

Although Bellcore has done some systems integration work for the Baby Bells, it has not formed many strategic partnerships with integrators. The company did have discussions with Andersen Consulting and Electronic Data Systems Corp. that "didn't go anywhere," said Silva.

Aerospace, based in El Segundo, Calif., offers SAIC a steady infusion of defense contracts worth roughly $300 million per year. Pentagon officials have used Aerospace experts to improve the reliability of satellite launchers, predict the lifetime in space of classified spy satellites, and to compare contract bids by rival companies.

Aside from its Pentagon contracts, Aerospace holds the promise of a major role in the commercial space business, said Mark Albrecht, a SAIC vice president.

By 2001, Aerospace could garner up to $150 million a year helping companies such as Lockheed Martin and Motorola launch their networks of commercial observation, telephone and data-relay satellites, he said. There are "many, many growing new commercial space ventures," that may choose to buy Aerospace's expertise, he said.

However, SAIC's merger plans face some obstacles.

For example, SAIC executives will have to overcome some government opposition before the company can absorb Aerospace, originally created to provide non-profit, in-house expertise to the Air Force.

"I have trouble seeing a for-profit organization [SAIC-owned Aerospace]... that can both be independent and impartial," Gen. Robert Dickman wrote in an e-mail to Aerospace officials. Dickman is responsible for coordinating the Pentagon's space programs.

These concerns have already had an impact on Aerospace, which was ejected from Pentagon deliberations over the award of a multibillion-dollar contract for development and construction of a new series of missile-tracking satellites. Aerospace was expected to advise government officials on which industry offer was most suitable, but was ejected by defense officials because SAIC is teamed with one of the bidders, said an industry official.

"We're studying [SAIC's] proposal [to buy Aerospace] and ... we're not for it, and we're not against it," said Arthur Money, the Air Force's acquisition chief. "In a perceived or real conflict [of interest], we'll handle that on a case-by-case basis," he said.

These concerns can likely be fixed, perhaps by reorganizing Aerospace into for-profit and non-profit segments, said the industry official.

But any reorganization might threaten Aerospace's long-standing Pentagon support contract, worth roughly $300 million per year, or 93 percent of its revenue.

"I don't view Aerospace as the smartest technical rat in the barn.... Sometimes they are better, but not always," Dickman wrote in the e-mail message.

"We believe SAIC is, and will be, the premier technical support organization in United States and the world," said Albrecht.

Another fly in the ointment is the increasing competition among the Baby Bells. The Bells are liquidating their joint asset, Bellcore, to divert research dollars into rival programs, leaving little opportunity for SAIC to work with all the Bells.

"As the [Bells] gain more independence following deregulation, the question to be asked is whether BellSouth will be doing a lot of business with IBM when [IBM] is clearly partnering with Ameritech," said Van Honeycutt, president of Computer Sciences Corp. "If you're a telecommunication company, wouldn't you be better off doing business with an independent of some sort? We're betting they would," said Honeycutt.

One industry official dismissed the buyout of Bellcore, saying SAIC was buying old technology at the cost of ignoring more attractive prospects in the fast-growing Internet sector.

SAIC officials also have to raise the funding for the two buyouts, despite their policy of selling shares only to employees. However, there are many ways for SAIC to raise funds needed to buy Bellcore and Aerospace, said Mark Nebergall, a tax analyst for the Software Publishers Association, based in Washington. For example, SAIC could finance the purchase with Bellcore's own assets and cash, said Nebergall. In July, Bellcore secured a $250 million line of credit from a group of banks. The loan was extended to help build up Bellcore's commercial work.

To help deal with the funding problem, senior SAIC officials suggested they may publicly sell shares in some sectors of the company, such as Network Solutions Inc., an Internet company based in Herndon, Va.

"We are primarily purchasing for cash," said Roper.

"Our acquisition strategy has increased in recent years, and that is a reflection, in part, of some of the growth rates inside our major markets [which] have been slower. It's no secret that the DOD budget has not increased in recent years and that's one of our major markets," said Roper.

But whatever the difficulty of digesting Bellcore and Aerospace, SAIC's takeover offensive also serves its defensive needs. By adding Bellcore and Aerospace, admittedly weak companies on their own, SAIC gains greater bargaining power in the shrinking federal marketplace.

Over the last year, SAIC has made a flurry of acquisitions. In June, SAIC bought Synetics Corp.'s federal, state and commercial business worth roughly $25 million per year. In November, SAIC bought a majority stake in two European telecommunications software companies, Tecsi, based in Paris, and Danet, based in Darmstadt, Germany.

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