Computer Data Systems Inc.'s $51 million purchase of Analytical Systems Engineering Corp. is just the beginning of the company's strategy to more than double its revenues over the next five years, CDSI officials said.
Through acquisitions, the Rockville, Md-based company wants to grow from about $300 million in revenues in 1996 to $750 million to $1 billion by 2001, said John C. Kezer, CDSI's treasurer.
The addition of Burlington, Mass.-based ASEC should boost annual revenues to more than $400 million by next year, analysts said. The deal is expected to be completed by the end of June after a regulatory review.
Targets for more acquisitions are other companies like ASEC, which has strong ties to the Department of Defense and intelligence agencies, Kezer said. "That is definitely an area of emphasis," he said.
CDSI also is looking to broaden its range of civilian agencies and strengthen its outsourcing offerings, he said.
Currently, CDSI primarily has contracts with the Department of Education to process student loans and with the General Services Administration to provide services in the central and western regions.
"To grow our information technology business within the government, we'll have to do it through acquisitions," Kezer said. "We are looking to make several."
No time frame is set for the next purchase, but the company has potential deals currently in the works, Kezer said. "At any one time there are five to 10 deals in the hopper," he said.
Consolidation of companies is coming to the information technology services industry, and "we want to be on the front edge of that," he said.
To give the federal government a full spectrum of services, companies need to be a certain size. "You need critical mass," he said.
Increasing competition because of indefinite-delivery, indefinite-quantity contracts also is pushing companies to consolidate, Kezer said. "There is a lot of pressure to lower costs, so you need to be a certain size to gain efficiencies and economies of scale," he said.
The strengths of CDSI and ASEC are complementary, said William Loomis, an analyst with Ferris, Baker Watts in Baltimore. "ASEC brings capabilities in defense and systems engineering and CDSI brings more general systems integration and IT services capabilities," he said.
Thanks to its work in the intelligence field, ASEC also brings a large percentage of employees with high security clearances, which is very attractive, Loomis said.
"There is a lot of brain power there," Kezer said.
Loomis projects that the addition of ASEC should raise CDSI's revenues to about $415 million by June 1998.
With a few more acquisitions like ASEC, CDSI should reach its goal of being a $750 million to $1 billion company, Loomis said.
"I think this is a good start for them," he said.
CDSI will operate ASEC as a wholly owned subsidiary and it will retain its name and its management team, Kezer said.
"Any time there is an acquisition, customers have concerns," he said. "By leaving them alone, we hope to allay those concerns."
ASEC might take over some defense and intelligence contracts that CDSI has won. "There is one intelligence contract we will transfer over," Kezer said.
"This is certainly a relationship that is going to pay dividends for ASEC," said James Henderson, ASEC's president. Henderson will remain as president and will be a member of CDSI's board of directors.
CDSI has software and help desk capabilities that ASEC currently does not have, he said. "And we are going to bring them access to Department of Defense and intelligence markets," Henderson said.
While Loomis thought keeping ASEC as a subsidiary was a good approach, CDSI needs to watch out for certain pitfalls, he said.
"The thing that I see the most on acquisitions is that the cross selling [between the parent and the subsidiary] doesn't happen," he said. The business development directors at CDSI and ASEC need to be able to recognize opportunities for each other's unit.
"[CDSI] is aware they have to do this," Loomis said.