TRW Deal: 'A Watershed Event'

TRW Deal: 'A Watershed Event'


TRW's Joseph Gorman

By Nick Wakeman
Staff Writer

TRW Inc.'s $1 billion purchase of BDM International Inc. will speed consolidation of the information technology sector and raise the sale prices of companies with federal expertise, analysts and industry officials say.

The acquisition of McLean, Va.-based BDM adds about $1.2 billion in revenue to Cleveland-based TRW's $10 billion. The acquisition is expected to close by the end of December.

"I think this is a watershed event," said an information technology executive who asked not to be identified. This may "trigger a lot more activity."

TRW's purchase of BDM is the largest IT deal of 1997 but the size and pace of consolidation have been picking up in the last quarter, said Thomas Browne, an analyst with Prudential Securities Inc., New York. That consolidation wave is likely to continue as more and more companies find that bigger is better in the government market, he and other industry experts say.

"The way the government is buying information technology services is changing," said Philip Odeen, president and chief executive of BDM. "The larger organizations will be the successful ones."

For TRW, the purchase of BDM brings a strong defense and civilian government business and growing commercial markets, said Joseph Gorman, TRW chairman and CEO.

TRW was especially drawn to BDM's integrated supply chain management and enterprise management businesses, Gorman said. "This merger expands our systems integration capabilities and stretches our reach across many new customers and markets," he said.

BDM received a good price, said William Loomis, an analyst with Legg Mason Wood Walker Inc., Baltimore. "The last time we had an upswing in prices was in the late 1980s," he said. "We are in a similar type cycle now."

Federal IT companies need larger sales forces as the federal government increases its use of indefinite delivery, indefinite quantity contracts, multiple award contracts, contracts open to all government agencies, and the General Services Administration schedule, Loomis said.

"If you have a bigger sales force, you can sell across a wider variety of contract vehicles," he said.

From January through October, there were 22 deals involving publicly traded IT companies as either the buyer or seller, Browne said. The average price was $65 million.

In November, there were seven publicly disclosed deals - including the TRW-BDM deal - with an average price of $196 million, Browne said.

Many of the deals in 1997 involved primarily commercial information technology companies, but the sale prices paid for BDM and Computer Data Systems Inc., Rockville, Md., show that the market is willing to pay a premium for federal IT companies, said Paul Lombardi, president of DynCorp, Reston, Va.

BDM received a cash offer of $942 million, or $29.50 a share, plus an assumption of $38 million in debt. CDSI was bought by Affiliated Computer Services Inc., Dallas, for $373 million in September.

"Those deals are right up there with the commercial boys," Lombardi said.

The current wisdom for the optimal size of a company in the federal market is about $1 billion, said Jon Kutler, president of Quarterdeck Investment Partners Inc., Los Angeles.

Because BDM had already reached that level, BDM's motivation likely was not more bulk, he said. "For BDM, this was not a consolidation play, but a liquidation play," Kutler said.

About 26 percent of BDM was owned by the Carlyle Group, a Washington-based merchant banking firm, which helped buy BDM from Ford in 1990.

"This is a good time to be a seller, and this is a good deal for shareholders looking to make an exit," said Kutler, who works closely with the Carlyle Group but was not involved in the TRW-BDM deal.

Liquidating the Carlyle Group's interest was a consideration in the sale, but not the primary motivating factor, Odeen said.

Carlyle Group financed its $24 million investment in BDM through two funds that are coming due in 1999 and 2000. "So we knew that sometime before then, they would have to pay their investors," Odeen said.

Gorman said that the addition of BDM creates "a significant platform for growth. BDM is very complimentary to our businesses, especially in the federal, state and local markets," he said.

Roughly 66 percent of TRW's business mix is automotive, the remaining 34 percent is related to defense and space. With BDM, that mix changes to 60 percent automotive and 40 percent defense and space, Gorman said.

BDM's sale was a mild surprise to many watchers of the federal market, because the company has been a very aggressive acquirer.

"Everyone thought they were in the acquisition mode," said one executive who asked not to be identified. Indeed, BDM had approached the executive's company, which has revenues in the $200 million to $300 million range, looking to make an acquisition.

But the switch was not totally unexpected. "Anytime you are making acquisitions you also are making yourself a target for acquisitions," the executive said. "I think that is exactly what happened here."

The prices that BDM and CDSI fetched in the market increase the likelihood of other companies making deals, analysts said.

"As prices go up, more people feel the pressure to make a move," Browne said.

The pace also will pick up because with each deal, the number of players in the market goes down, Loomis said. Company officials begin thinking that if they are going to make a move, they had better make it now, he said.

For companies like DynCorp, which executives say is not on the block, an offer such as the one BDM received "is something we would have to look at," Lombardi said.

The bottom line in deciding whether to sell is increasing the value to shareholders, said Jack London, chairman and chief executive of CACI International Inc., Arlington. CACI has no plans to be sold, he added.

But in the current market, everyone is a candidate for an acquisition, Loomis said.

"We are not done yet," Browne noted.


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