Start-Ups Help Nichols Crack New Markets

Nichols' Chris Horgen says the company only buys into companies that fit into its strategies.

By Nick Wakeman

Staff Writer

Nichols Research is blending conservative business principles with the risk-taking of a venture capital firm to broaden its business base and enter commercial markets.

Since 1995, the systems integrator has bought minority interests in several start-up firms and bought others outright to win commercial business and decrease its reliance on defense contracts.

So far, the strategy has helped the company enter two new markets - health care and telecommunications. The Huntsville, Ala., firm is now eyeing small IT companies that serve process manufacturers.

The benefit to Nichols has been access to new customers and technologies. "We are only buying into companies that fit into our strategies," said Chris Horgen, chairman and chief executive officer of Nichols.

The end result, he said, will be a 10-year makeover from a firm that garnered nearly 100 percent of its revenues from defense contracts to a company with a mix of defense, civilian government and commercial business.

The revamping of the company began in 1990 when it earned $75.5 million from defense work, primarily weapons systems testing and simulation. By the year 2000, Horgen sees a company with a mix of about 40 percent defense, 40 percent civilian government and 20 percent commercial.

In 1996, when the company made $242.3 million, that mix was 57 percent defense, 27 percent civilian government, and 16 percent commercial.

Analysts project 1997 revenues will be in the range of $321 million to $349 million.

Horgen said he wants the company to maintain an annual growth rate of 20 percent to 25 percent. The 20-year-old company's historical growth rate has been in that range.

In the late 1980s, the company began looking for new markets when defense spending started to decline. The first focus was federal civilian and state work.

"We had always been a heavy user of large computer systems," Horgen said. Nichols' experience with those systems translated well into other government work, he said. Among the company's early wins were efforts for the Centers for Disease Control and the state of Alabama.

Adding the civilian government work was an easy move. "We already understood the procurement process," Horgen said.

But to target commercial work, the company knew it had to look outside itself, he said. "We had to buy domain knowledge."

The company now has four operating divisions. Nichols Federal handles the traditional defense and intelligence work. Nichols InfoFed does federal and state IT business. Nichols InfoTec handles commercial IT, and Nichols Select deals with health care and insurance IT.

Nichols' strategy of buying a minority interest in a firm with an option to later buy a controlling interest or help the company go public is rare, analysts said.

"Most companies want more control" from the beginning, said analyst William Loomis with Ferris Baker Watts, Baltimore.

"I think it shows how conservative they are," said Moshe Katri, an analyst with Oppenheimer & Co., New York.

Horgen readily acknowledges the conservative bent of the company. "We tend to want to bring deals onto our balance sheets when they can increase stockholder value," he said.

If Nichols bought controlling interest in the young companies from the start, it might be several years before Nichols saw a financial benefit, he said.

Also, the company does not want to stifle the entrepreneurial spirit of the smaller company, he said. To help this spirit, Nichols brings in management experience, cash and technical prowess.

Using this approach, Nichols in 1994 bought a 20 percent stake in TXEN, Birmingham, Ala. At the time the company had about $2.5 million in revenues from its managed care IT business. This year it is expected to make $12 million with $2 million in profits. Nichols is buying a controlling interest in the firm this year.

"The key was, all the management had an incentive to continue the company's growth," Horgen said.

Last year, Nichols purchased 20 percent of HealthGate, Boston, a company that provides medical content over the Internet. It is expected to become profitable next year, he said. Nichols has no plans to buy a controlling interest, but instead will help the company go public.

"They really know where they want to expand," Katri said.

A positive move for Nichols was bringing on board Michael Mruz as president and chief operating officer in 1994, Katri said. Mruz was executive vice president and chief financial officer of BDM International, McLean, Va.

"He has a lot of merger and acquisition experience and the knowledge of how to tap into commercial markets," Katri said.

The push into commercial markets will not distract the company from its core business with the government, Horgen said. In 1997, it expects to bid on more than $1 billion in government work and win about $500 million in new business, he said. The company also still looks to buy IT firms that specialize in
government work.

Last year was a banner year for the company. It captured two of four High Performance Computing Modernization Program contracts issued by the U.S. Army Information Systems Selection & Acquisition Agency. Those two contracts could total more than $300 million.

"The wins positioned them with the top IT firms," Katri said. "No one expected them to win more than one. [Winning two] was very impressive."

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