Acquisitions AddMuscle to Nichols' Plan

Acquisitions Add Muscle to Nichols' Plan

By Nick Wakeman

Nichols Research Corp. is blazing a new path as a higher-margin systems integrator that keeps adding heft through acquisitions and other strategic investments.

"In today's world, internal growth alone won't get you where you want to go," said Michael Mruz, chief executive and president of the publicly traded company with $379 million in 1997 revenue.

This outlook has driven the Huntsville, Ala., integrator to complete seven acquisitions in the past four years, excluding minority investments in companies Nichols eventually may decide to buy outright.

Nichols should hit the $400 million revenue mark in 1998 with 50 percent coming from defense-related work, 30 percent from civilian agency business and the remainder from commercial accounts, according to Mruz.

Analysts predict revenue will climb to $480 million in 1999. The company's stock was trading at $24.50 Aug. 21, midway between its 52-week high of $28.75 and low of $20.37.

Mruz and Chris Horgen, Nichols' chairman and co-founder, are busy executing a four-year-old strategy to diversify the company's business base, which traditionally has tilted toward the Department of Defense. The company provides a wide range of support, consulting and information technology systems integration services in the government and commercial health care markets.

In the next five years, Mruz and Horgen want each core area ? defense, civilian and commercial ? to kick in one-third of the company's overall revenues.

To get there, the company has inked deals in the $10 million to $50 million range to acquire a handful of defense, law enforcement, intelligence and health care companies.

While acquisitions have been important to Nichols' strategy, the company has not ignored internal growth, said Thomas Meagher, an analyst with Ferris Baker, Watts of Washington.

"They have had a good string of wins with their core customers," he said. "Obviously, that is key, because you want to make sure you are protecting what you have."

The company's contract backlog is about $1.2 billion, Mruz said. Important government customers for Nichols include the Army, Air Force, FBI, NASA and the Centers for Disease Control.

Just last month, the company acquired Welkin Associates of Chantilly, Va., for about $9.5 million to bolster Nichols' work with intelligence agencies.

In its fiscal year that ended March 31, Welkin did about $18.4 million in revenue, primarily with national security and intelligence agencies. The company provides engineering and acquisition management services.

That purchase follows the May 1996 acquisition of Advanced Marine Enterprises Inc. of Arlington, Va., which Nichols bought to bolster its work with the Navy. Advanced Marine provides naval architectural and marine engineering services. That deal was worth about $17.5 million.

"We knew we had to flesh out those areas in order to have a broad-based business, even though those companies had typical government operating margins," Mruz said.

In April, Nichols purchased Mnemonic Systems Inc. of Washington, D.C., to drill into the law enforcement agency business. Nichols picked up the $23 million-a-year company for about $12 million.

The law enforcement and intelligence markets are hard to penetrate without buying into them, said Richard Knop, a partner in the investment banking firm Boles Knop & Co. of Middleburg, Va., who worked with Nichols on the Mnemonic deal. That is because those markets rely on security clearances and "relationships with customers that take years to build," Knop said.

Last August, the company added Txen Inc. of Birmingham, Ala., for about $44 million to build its health care business. In 1994, Nichols had bought a 20 percent stake in the company. In Txen's fiscal year 1997, which ended June 30, 1997, the company had about $15 million in revenue. This year, analysts expect about $42 million.

The company's health care business has done so well that the company plans to spin off the unit in early 1999 as a separate publicly traded company. But Nichols will retain majority ownership of the new company.

"If the [initial public offering] is successful, they will make a real big splash in the industry," said William Loomis, an analyst with Legg Mason Inc. of Baltimore.

Another part of Nichols' acquisition strategy is buying a minority interest in a company with an eye toward a full acquisition later. Txen began that way in 1994, and in 1997, Nichols bought a 35 percent stake in Intertech Management Group of St. Louis, a software and data processing firm that serves the telecommunications industry. It had about $6 million in revenues in 1996.

Outright acquisitions will continue to be an important part of Nichols' growth strategy, said Mruz, who is working on three deals to build the company's commercial information technology business.

A fourth deal, which involves a company that builds weapon systems for the United States, could fall through, Mruz said.

"We have been negotiating for a long time, but I'm not sure we are going to get to the finish line on that one," he said.

In the defense arena, Nichols is trying to build off its experience with the Army and Air Force to pursue work in training, logistics and command, control, computers, communications and intelligence systems, Mruz said.

"We have always been a believer that defense is a good market to be in, but you have to be in the right places," he said. "We see a tremendous amount of money and problem sets that need to be solved."

On the civilian side, Nichols wants to build on the relationships Mnemonic has developed through its work with the FBI as well as work modernizing information technology systems, he said.

"There is a lot more to be done, and we see that going on for a long time," he said.

Nichols is on two teams that won the General Services Administration's recent Seat Management contract for agencies to outsource desktop computer equipment and services. That contract is potentially worth a total of $9 billion over 10 years to its eight winners.

Nichols will provide high-performance workstations as part of IBM Corp.'s team for the seat management contract; it will provide all workstation services as a subcontractor to a team lead by MultiMax of Largo, Md. "We are treating this as a substantial opportunity," Mruz said, even though the company has not added the contract to its backlog.

"It is one of our major thrusts in the government IT arena," Mruz said.

He acknowledged it might take a while for the contract to take off because it is very different from the way the government usually buys computer hardware and services.

"It may take awhile for the government to get comfortable with it, but the concept is so good, I can't imagine that they won't do it," he said.

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