Cash-Rich BDM Poised for Buying Spree


Cash-Rich BDM Poised for Buying Spree

Shopping list includes many integrators

By Nick Wakeman, Staff Writer

Even though the gift-giving season has just ended, BDM International Inc. is looking forward to another present of sorts this June. That's when rules that limit acquisitions will expire.

The McLean, Va., company can begin using pooling of interest accounting methods on June 29.

"Not that we are counting the days," joked C. Thomas Faulders III, BDM executive vice president and chief financial officer.

While the company's acquisition activities have not been dormant (BDM made four purchases in 1996), the company soon can go after larger, more complex deals. Such acquisitions are key to increasing commercial business, BDM officials said.

By 1998, BDM's commercial business is expected to reach 35 percent, said C. Thomas Faulders, CFO.

"I think you'll see the largest purchase in BDM's history in 1997," said Philip A. Odeen, the company's president and CEO. There is a list of about 30 companies BDM is interested in acquiring, he said, nearly all of which are commercial concerns and systems integrators.

For 1996, BDM is projected to have slightly more than $1 billion in revenues. About 18 percent stems from commercial business, 37 percent from U.S. defense work, 24 percent from international defense and 21 percent in federal, state and local civil contracts. By 1998, officials expect commercial business to reach about 35 percent, Faulders said. About half of that growth will come from acquisitions, he said.

BDM will target companies that complement what it is already doing, Odeen said. Most of the company's commercial business is in integrated supply chain management or manufacturing, distribution and warehousing, he said.

BDM purchased New York-based RTGI Systems Software in November 1996 to augment its warehouse management capability, Odeen said. "You can probably look for us to make more acquisitions to fill out that offering," Odeen said.

RTGI's warehousing products will help the company pursue commercial clients such as current customers Ford, The Gap, Kroger and Sony Europe, company officials said. Alliances with software developers such as Baan Co., Ede, The Netherlands; CAP Gemini, New York; Novell Inc., Provo, Utah; and SAP America, Philadelphia, also should draw more commercial clients.

Utilities are another market BDM is targeting as that industry undergoes deregulation. The company also will pursue work in telecommunications and financial services, company officials said.

RTGI was purchased for $16.4 million using BDM's cash balances. That meant the company was not subject to accounting industry rules that prohibit pooling of interest in a deal where the purchasing company has been a subsidiary within the past two years.

The Carlyle Group, a merchant banking firm in Washington, D.C., owned more than 50 percent of BDM until BDM had a public stock offering in June 1995. That offering brought Carlyle's interest below 50 percent, prompting restrictions on the way companies can structure acquisitions. Those limits are imposed by the Financial Accounting Standards Board, which sets national accounting regulations.

Acquisitions might be the best way for BDM to move into new markets and offer new products, said William Loomis, an analyst with Ferris Baker Watts, Baltimore. He agreed with the company's strategy of pursuing complementary markets, such as warehouse management.

While increasing the commercial proportion of BDM's business is important, it is equally, if not more important to concentrate on what types of commercial business to pursue, said Thomas E. Browne an analyst with Prudential Securities, New York.

BDM officials also intend to find commercial markets for technology developed for federal clients. During a restructuring in October of BDM's business units, the BDM Technologies unit was turned into an incubator of sorts to find commercial uses for federal technologies, Odeen said. The most notable project will be the commercialization of Cybershield, a network security package BDM developed for the National Security Agency, he said.

"I think you'll see the largest purchase in BDM's history in 1997," said Philip A. Odeen, BDM's CEO and president.

The Federal Systems unit now has three divisions that cover development, integration, and operations and maintenance. William Hoover, executive vice president, oversees Federal Systems and State and Local Systems.

Hoover, who joined the company in June 1996 after serving as president of PRC, McLean, Va., sees defense as a strong base for the unit. But he would rather see a 50-50 split between the defense and civil businesses. BDM was one of five winners on the Defense Enterprise Information Services (DEIS II) contract to supply infotech services to the military. In 1996, the split was closer to 75-25, he said.

The first half of 1997 will see several federal civilian awards involving contracts BDM has bid on. They include one potentially worth $200 million for the new Electronic Data Gathering Analysis and Retrieval (EDGAR) system for the Securities & Exchange Commission, he said. BDM developed the original system, which allows filing, searching and retrieval of SEC documents.

Another important contract is an information system for the Food & Drug Administration that will link drug application reviewers and headquarters' personnel, Hoover said.

"The federal business is doing very, very well," Prudential's Browne said. The unit's success has slowed the change in the company's mix among federal, state and commercial business, he said.

"But that's not a bad thing," he said. "You would rather see all the business units doing well."

The Justice Department and Health and Human Services are two other agencies that have attracted BDM's interest, Hoover said. Both offer opportunities in their own right, such as the Justice Department's $115 million Information Technical Support Services contract that BDM won in September. Such agencies also offer gateways to state contracts because they administer grants to the states, Hoover said.

BDM has already been successful in winning state business, including a $25 million contract in Montana to develop an online system integrating Aid for Families with Dependent Children, Food Stamps, Medicaid and state child care programs.

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