Government Holds Key for BTG

Government Holds Key for BTG


By Bob Starzynski
Staff Writer

BTG Inc. is following the government contractors' march to the commercial market, but is taking an approach that keeps its government work front and center.

Traditional government systems integrators have flocked to the commercial market in search of lucrative new work. The commercial market is a $200 billion business that is growing 15 percent a year, compared with its $23 billion government cousin that is growing only 1 percent a year.

Typically, a contractor will set up a commercial division, buy established businesses to staff and congeal that division, and quickly try to balance its commercial and government business in an even mix. Computer Sciences Corp., Lockheed Martin Corp. and BDM International Inc. have perhaps been most successful in making that transition.

Edward Bersoff, BTG's chairman, chief executive and founder, is busy taking his 15-year-old company in the same commercial direction. But interestingly, he is not establishing a separate commercial division. And he intends to keep half of the Fairfax, Va.-based business in product reselling, despite an industry trend toward higher-margin services, such as consulting, customized client/server design and intranet development.

"The market demands and places a premium on commercial business," said Bersoff. "But our heritage, history and most of our profits are in government business. That doesn't mean we are not interested in pursuing a commercial path. ... It's just that every time you try something new you take a risk."

To keep risks in check, BTG will not set its commercial work aside in a separate division; this, despite the fact that it just hired Peter DiGiammarino as senior vice president for services and products to commercial and civilian government clients. Commercial and government business will be fully integrated for BTG, allowing contracts in both sectors to pull from one labor pool. If a worker is idle on commercial work, they can lend time to a government project, or vice versa.

The company's approach to the commercial market may appear cautious. But, because investors have been disappointed with BTG over the past several months, the company has to be especially careful of its commercial risks, according to analysts. BTG's stock has fallen from a 52-week high in January of $27.88 to close at $10.63 on Nov. 28 on the Nasdaq National Market.

BTG spent many years on a roll, growing revenue 1,500 percent to $400 million in the past five years and establishing a reputation for consistent earnings increases. The company made a number of strategic acquisitions but fueled two-thirds of its growth internally.

A rude awakening came in the first quarter of this year for BTG and most of its government information technology competitors. Margins were getting narrower in government work and start-up costs for commercial work were adding up. BTG lost five cents a share in its quarter ended in March. Then in September, the company lost another 27 cents a share.

"Just because government IT spending is flattening does not mean that the market is not lucrative," said Tom Meagher, an industry analyst for Ferris, Baker Watts Inc. in Washington. "However, these companies have to continue to produce if they want a favorable reaction."

Meagher had originally projected BTG to earn 36 cents a share in the quarter ended in September. When the loss of 27 cents was released, he downgraded his rating on the company to "hold." A month before, it had been a "buy."

Bersoff attributes the poor earnings performance in two of the past three quarters to investments in a new cable Internet subsidiary, start-up costs on recently won contracts and general lack of efficiencies attributable to most fast-growth companies. But, he said, he is more focused on the business than on the stock performance.

By keeping commercial and government work closely tied, BTG will gain efficiency in its labor costs, Bersoff said. The company is set to close the acquisition of New York-based Micros-to-Mainframes Inc. this month for $25 million.

That will give BTG another $75 million in commercial revenue, bringing that segment from 10 percent to 20 percent of the company's overall earnings.

Another important strategy for Bersoff is maintaining a focus on both products and services in the government sector.

The company started out in the early 1980s as a systems engineering firm and diversified into product reselling five years ago. Now, two-thirds of its business is reselling - a market that has become extremely competitive as the government has streamlined its procurement procedures. Ideally, Bersoff wants products and services to be evenly balanced. But he is not interested in phasing out product reselling, regardless of its narrow margins.

"We can't cherry pick our customers' shopping lists," he said. "We have to offer certain products even if they [have low profit margins]." Many times, the company can use its product offerings to help generate services contracts, he said.

William Loomis, an analyst with Legg Mason Wood Walker Inc. in Baltimore, does not see it that way.

"[BTG] is not doing anything to cut back on reselling," he said. "If I were them, I would look at
how lucrative their contracts are and weed out the less profitable ones."

Furthermore, Meagher and Loomis agree with Bersoff that the commercial and government work can benefit from a joint work force but caution about completely integrating the two worlds.

"If we're just talking about combining the labor pools, that's a good strategy," Loomis said. "But if we're talking about combining business marketing and finance groups from both sectors, that's tough to do."

The company has 1,600 employees, double the work force of five years ago.

Regardless, Bersoff believes that BTG's growth potential will not slow in the government market even though government spending has flattened.

As other large companies in the market consolidate, they must dispose of business units that are redundant or create conflicts of interest. Bersoff said that gives BTG an opportunity to gain market share by acquiring the leftovers.

"Every time Lockheed [Martin] buys something, we see part of it for sale," said Loomis.

Could BTG find itself on the other side of the table - the possible target of a large takeover or merger?

"My objective is to remain an independent IT company," Bersoff said. "Besides, right now our stock price is depressed and that lowers our valuation."


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