Federal Market Demands Mergers, Buyouts

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Federal Market Demands Mergers, Buyouts

By Nick Wakeman
Staff Writer

INFOTECH COMPANIES ACTIVE IN THE MARKET
The Buyers:
BDM International Inc., McLean, Va.
BTB Inc., Fairfax, Va.
Litton Industries Inc., Woodland Hills, Calif.
Nichols Research Corp., Huntsville, Ala.
Vista Information Technologies Inc., McLean, Va.
CACI International Inc., Arlington, Va.*
Computer Data Systems Inc., Rockville, Md.*
The Sellers:
CACI International Inc., Arlington, Va.*
Computer Data Systems Inc., Rockville, Md.*
GRC International Inc., Vienna, Va.
* mentioned as both buyers and sellers
Source: Various industry analysts

Federal procurement reform, government outsourcing, year 2000 conversions and welfare reform systems are prompting a wave of consolidation among information technology companies, which need greater resources to take advantage of a changing marketplace.

But don't expect a lot of sales of more than $100 million because most of the deal making is involving firms selling for less than $50 million.

For example, BDM International Inc. of McLean, Va., bought British systems integrator Largotim Holdings Ltd. in April for $39 million. And Computer Data Systems Inc. of Rockville, Md., bought defense and intelligence systems integrator Analytical Systems Engineering Corp. of Burlington, Mass., for $51 million in May.

Companies in the market to buy range from larger companies such as BDM and Litton Industries, Woodland Hills, Calif., to midsize firms like Nichols Research Corp., Huntsville, Ala., and BTG Inc., Fairfax, Va. Also in the mix are small companies like Vista Information Technologies Inc., McLean, Va., which was formed in March to buy other companies.

Some companies such as CACI International Inc., Arlington, Va., and CDSI get mentioned by analysts as being on both the potential buyer and seller lists. Another potential seller is GRC International Inc., a Vienna, Va.-based integrator specializing in defense and intelligence analysis, simulation and testing projects. GRC had about $124.5 million in revenues in 1996.

The larger deals - involving companies with revenues in the range of $100 million to $500 million - will only come as the industry continues to adjust to large governmentwide contract vehicles that have multiple winners, analysts said.

With large indefinite-delivery, indefinite-quantity contracts, systems integrators must have a proactive sales force, which raises costs, said William Loomis, senior analyst with Legg Mason, Baltimore.

"In the long run, you must either be a smaller niche player or a larger company that can spread its bidding and sales costs over a larger revenue base," he said.

Acquisition activity will increase among federal contractors because the contracting changes are putting pressure on the smaller companies, and there are a lot of smaller companies, said James TenBroek, an associate with the Chicago investment firm Golder, Thoma, Cressey, Rauner Inc.

Winning and managing IDIQ contracts is more expensive than single-source contracts because companies have to compete to win task orders even after they've won the contract itself, Loomis said. Government-wide contracts, blanket purchasing agreements and more aggressive General Services Administration schedules also mean that agencies have a wider range of choices from which to buy information technology.

Two growing markets that a lot of companies want to play in are year 2000 computer solutions and welfare reform systems, said Moshe Katri, an analyst with UBS Securities, New York. Spending on information systems to help states comply with federal welfare reform requirements is expected to be $15 billion over the next three years, he said.

The fastest way for companies to get into these new markets is to buy their way in, he said. "Year 2000 buying should really pick up this year," he said.

The federal government's growing interest in contracting for outsourcing and other professional services also will help create larger IT companies. "You need size to take advantage of these projects," said Thomas Meagher, an analyst with Ferris, Baker Watts, Baltimore.

Loomis estimated that companies will need "critical mass" of at least $500 million to $1 billion in annual revenues to compete for larger government projects.

Often the management of smaller companies either don't have the skills or the desire to push their companies to the level needed to compete for larger projects, TenBroek said.

Vista officials, who are counting on acquisitions to grow their company to a $500-million-a-year systems integrator, are eyeing these smaller companies, said Dunlop Scott, Vista executive vice president and chief financial officer. TenBroek worked with Scott and James Duggan, Vista's president, to finance and create the company earlier this year.

Vista bought General Analytics Corp. of McLean, Va., in March, and has other deals in the works, Scott said. General Analytics specializes in geographic information systems, local area and wide area networks, and telephony.

"There are lot of companies on the block but there are more buyers than sellers, too," he said.

Older contracting rules with set-asides for smaller firms helped create a large number of small IT companies in the Washington area, and it is these companies that are getting the most attention on the market, both from owners looking to sell and buyers looking for new technologies and markets.

Procurement changes are making it harder for the $20 million to $50 million companies to compete, Meagher said.

"The owners are looking to cash out because they see the handwriting on the walls," he said.

These smaller companies often have three things larger companies are looking for - people, access to markets and new technologies, analysts said.

Another driver for acquisitions is a shifting client base, especially for defense information technology companies, said Rich Leggett, an analyst with Friedman, Billings, Ramsey & Co., Arlington, Va. Defense IT companies are looking to get into commercial and civilian government markets because the defense market is not growing as rapidly, he said.

But the IT market is not likely to see the wholesale consolidation that the defense and aerospace industry went through, said Douglas Schmidt, managing director of Legg Mason.

"I think there is a lot less going on than people want to believe," he said.

The defense and aerospace industry went into a consolidation frenzy because its market was static and shrinking. "That forced a lot of companies to consider sales," he said.

But the IT market is booming. "So it is very hard to make someone sell when they are enjoying favorable growth trends," Schmidt said.

However, with fewer sellers, an abundance of buyers and a growing market, now might be the best time to sell, Schmidt said.

"Because when [the market] gets bad and when everyone is trying to sell, there won't be as many buyers," he said.

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