Titan Corp. Charts Bold Acquisitions Course

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Titan Corp. Charts Bold Acquisitions Course

By Nick Wakeman
Staff Writer

The wobbly stock market has not swayed Titan Corp. executives from their plan to create a $500 million defense business and spin it out into a separate company during the next two years.

Their ambitious strategy also calls for three commercial units to be spun out in the same time frame.

San Diego-based Titan, founded in 1981 as a defense contractor specializing in command and control systems, secure networks and intelligence systems, has hit the acquisition trail hard in the past year.

Titan has sealed four deals for defense information technology companies and reached a definitive agreement on a fifth defense company.

In the process, Titan has built its defense business from about $88 million in 1997 to a projected $200 million in 1998, said Gene Ray, president and chief executive of the company.

"We are almost halfway to our goal," said Ray, who wants the defense IT business to reach $500 million in annual revenue by early 2000. His long-term goal is $1 billion.

Overall, the publicly traded company had $171 million in revenue in 1997: about $88 million from defense information technology, $49 million from its telecommunications unit, $17 million from software development, $10 million from its emerging technologies division and $6 million from its sterilization business.

Ray makes a distinction between a spin out and a spinoff, in that in a spin out, the parent company retains a majority interest in the new company's stock. Analysts call it an "equity carve out" strategy.

Spinning out four of Titan Corp.'s five divisions, except for the emerging technologies unit that the company uses as an incubator, is a good idea, said David Weinstein, an analyst with the equity research firm Joseph Charles & Associates in Boca Raton, Fla.

The individual parts of the company will be more valuable as separate companies than collectively as part of a single company, Weinstein said.

"Titan is like a miniconglomerate," said Thomas Meagher, an analyst with Ferris Baker, Watts of Baltimore.

The company is modeling itself after the successes of Safeguard Scientifics Inc. of Wayne, Pa., and Thermo Electron Corp. of Waltham, Mass., which have built stables of companies they have spun out while retaining a controlling interest, Ray said.

But the model created by companies like Safeguard and Thermo Electron is a very difficult one to mimic, said Jon Kutler, president of Quarterdeck Investment Partners of Los Angeles, a firm that brokers mergers and acquisitions.

"Your credibility in the market is gained over many years of successfully spinning off deals, growing and creating value," Kutler said. "It is hard to just say, 'I'm going to copy that model and, therefore, I should get the same credibility as a Safeguard.'"

But Titan's credibility got a boost in 1997 with the hiring of Eric DeMarco as chief financial officer, Weinstein said. DeMarco had been a senior audit manager with the accounting giant Arthur Andersen.

Gene Ray, President and CEO of Titan Corp.

As the founder of Titan, Ray has been a technology guru who has stumbled at times with financial decisions, Weinstein said.

"But now you've got a real number cruncher with your visionary. That is your secret formula," he said.

When the market for initial public offerings is right, the defense IT unit will be spun out into a separate company with Titan retaining between 75 percent and 80 percent of the stock, Ray said.

"We are in no hurry, so we'll wait until the market conditions are reasonable, but sometime in the next year or two we would expect it to be ready," he said.

Titan's acquisition activity is part of the rising wave of consolidation among defense IT companies, particularly in the medium to large range.

Nichols Research Corp. of Huntsville, Ala., and CACI International Inc. of Arlington, Va., also have been busy making defense-related acquisitions.

Consolidation among larger defense companies "is largely completed," Ray said. "It has gone fairly slower for the smaller defense information technology companies, but it is finally here."

On its shopping spree in the last eight months, Titan has bought:

  • DBA Systems of Melbourne, Fla., for about $22 million;
  • Validity Corp. of Encinitas, Calif., for $15 million;
  • Horizons Technology Inc. of San Diego for $19 million;
  • VisiCom Inc. of San Diego for $55 million.

A deal with Delfin Systems of Santa Clara, Calif., is pending Securities and Exchange Commission review. It is valued at $22.5 million.

The deals have added increased capabilities in networking, security, imaging and simulation, and communications.

Most of the acquisitions have strengthened Titan's work with the Navy and Air Force, while DBA brings relationships with the Army, which gives Titan a good opening to a new market, Weinstein said.

Ray said he expects the acquisitions to continue in the $20 million to $60 million range, although the company will consider larger deals. The deals so far have been stock swaps, but the company also has an $80 million line of credit with the Bank of Nova Scotia.

On the commercial side, Titan is relying on internal growth to build divisions around telecommunications, software development and medical product sterilization and food pasteurization.

But Ray said he is confident those also will be ready for similar spin-outs in the next year.

"I'd be disappointed if within the next year we have not executed some part of this strategy," he said.

In fact, the telecommunications business, called Linkabit Wireless, registered for an initial public offering in December, but withdrew the registration in June because of softness in the IPO market and economic problems in Asia, its primary market, Ray said.

Linkabit Wireless uses a wireless technology that Titan developed for the military to construct a system of satellite-based pay phones.

"Titan is one of the few companies that has been able to successfully make the transition from a defense technology to a commercially viable technology," Meagher said.

The technology in the company's sterilization and pasteurization business also stems from military applications. The most promising aspect of that technology is its application in killing bacteria such as e.coli, analysts said.

The Food and Drug Administration has approved radiation as a way to treat food but the Department of Agriculture must develop dosage guidelines. Those guidelines are expected in the fall, Weinstein said.

"If this turns into a market, Titan wins big," Weinstein said.

"You could see some explosive growth in that area," Meagher said.


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