Coming Soon to a Market Near You

MARKET SHARE Bob Starzynski

Coming Soon to a Market Near You

If the concept of a business roll-up is not very familiar to you, the coming months are likely to change that. The technology industry, which has long been accustomed to a big dose of mergers and acquisitions, is about to get a good look at this phenomenon.

A roll-up gets you a $100 million company by piecing together a bunch of small companies. It's simple: Find a financier and promise that with the money, you can roll together several small businesses that can collectively enjoy economies of scale. A larger company has proportionately lower overhead costs, lower production costs and higher purchasing power than the mom and pops. The savings are indisputable, so who wouldn't finance such a business?

Roll-ups are becoming more prevalent among tech companies, especially in the Washington region. In the past year, we have seen Vista Information Technologies of McLean, Va., go from a gleam in founder Jim Duggan's eye to a business with 1,000 employees in 24 offices around the country.

In February, Condor Technology Solutions of Annapolis, Md., burst into business by bringing together eight information technology contractors and going public simultaneously. Condor has more than 500 employees and trailing 12-month revenue of $160 million.

Last month, AppNet Systems Inc. of Bethesda, Md., received $100 million in venture capital backing to roll up numerous small businesses in the electronic commerce market.

Well, campers, the fun is just starting. A slew of roll-ups are expected in coming quarters. Why? Because they are trendy deals that can be put together easily during boom times. Money is no problem in today's market, and haven't you witnessed enough consolidation to see that bigger-is-better sentiment shining through?

Next in line with a roll-up is IT Partners Inc., a Columbia, Md., company that wants to go public with a $110 million initial public offering. Yes, that's right, a company you probably have never heard of will be worth more than $200 million soon, market willing.

IT Partners, which filed to go public earlier this month, was founded in 1996 by Joel Klein and Jamie Blech, both former executives at Green Spring Health Services. Klein and Blech have rolled together eight companies for $75 million since May 1997. Their company has 735 employees and posted pro forma revenue of $106 million last year.

IT Partners has services that run the gamut, including systems and network integration, software development and Internet and intranet solutions. But IT Partners won't stop with an eight-company roll-up. If the IPO goes through as planned, the company will finalize the acquisition of 10 more businesses for another $48 million in cash and stock.

Once factored in with IT Partners' operations, the acquisitions would bring the combined company close to $200 million in annual revenue and 1,200 employees.

But just because roll-ups are trendy does not guarantee they are smart investments. Sure, IT Partners is putting together a $200 million company. However, the 18 businesses that are part of the puzzle lost $6.3 million last year. And you thought commercial IT contractors had handsome margins.

The company admits it's paying a premium for the businesses it is banding together. Because the prices paid for these businesses are significantly higher than their asset values, IT Partners is entering the public market with a lot of goodwill. Contrary to the sound of the term, goodwill is not something you want a lot of on your balance sheet.

Lastly, take a look at the other prime example of an information technology roll-up that went public, Condor Technology. Since its debut in February at around $13 a share, Condor jumped to $18 in late April but has seen its price drop ever since. On Aug. 21, the stock closed at $12 a share after hitting its all-time low in midday trading.

For questions, comments and suggestions, contact Bob Starzynski via e-mail at bobs@pnbi.com.


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