Looking at all the acquisitions of technology companies, you'd think the answer would be, "Yes, we are." That's the way much of the industry is operating in the waning years of the century. To grow, you buy a competitor, combine operations, slash all overlapping costs and let investors praise you for your savings and ingenuity. But two things during the past couple of weeks made me take a look at IT consolidation from a different vantage point, and I came to some new conclusions. They were the cancellation of Lockheed Martin Corp.'s proposed purchase of Northrop Grumman Corp., and the secondary stock offering of a bit player in the satellite software business, Integral Systems Inc.
First conclusion: This acquisition frenzy that has gripped the IT business for some time now is a game where you can never reach the light at the end of the tunnel.
Why did Lockheed want to buy Northrop in the first place? To realize a cost savings on the bottom line and to boost sales on the top line. What kind of boost does Lockheed really need? The company has more people - closing in on 200,000 - than Fargo, N.D.; Jackson, Miss.; Santa Fe, N.M.; or Topeka, Kan.
Lockheed is already the largest competitor in its market. Yet it felt the need to to add billions of dollars to its revenue to keep the competitive edge. How BIG is big enough?
Let's go back to the company I mentioned at the beginning of this column. When that company hits $2.5 billion in 2003, the Lockheeds of the world will have doubled their revenues and cut their costs as well. That same CEO will tell me five years from now that he needs to "buy, buy, buy" to stay competitive. This vicious cycle will continue as long as these companies believe that buying for growth's sake is the only way to survive.
I reached my next conclusion after examining a secondary stock offering for Integral Systems, a Nasdaq SmallCap company. Call me master of the obvious on this one, but remember: Industry giants are not the only act in town.
Integral, a satellite software and ground systems maker founded in Lanham, Md., 16 years ago, wants to raise $27 million through a stock sale. The company has 165 employees and annual revenue of $20 million.
With the reasoning used by industry giants such as Lockheed, one would surmise Integral could never compete in selling satellite software to government and commercial clients. The company has made no recent acquisitions. And its primary competitors are the ilk of companies like Lockheed, Hughes Space and Communications Co., Loral Space & Communications, Orbital Sciences Corp., AlliedSignal and Computer Sciences Corp.
But Integral has done well at its own pace. Company revenue has grown an average of 21 percent each of the last five years. Not bad considering the space industry as a whole is growing 10 percent a year. The company has been profitable since day one and has not bought its growth through acquisitions.
Despite being a small fish in a big pond, investors are showing enthusiasm over the company's prospects. Integral's stock price, at $4 a share in 1996 and 1997, suddenly turned upward earlier this year and has reached as high as $18.50 in recent weeks.
The company has a clean balance sheet - a little more than $1 million in debt and close to $6 million in working capital. Profit margins have widened a bit in recent years, and the company has a fairly steady source of business coming from both government agencies and commercial customers.
What more could an investor ask for? Don't sound fundamentals raise your eyebrows anymore?
For questions, comments and suggestions, contact Bob Starzynski via e-mail at bobs@pnbi.com.
