GTE Sale Beckons Many Systems Integrators

GTE Sale Beckons Many Systems Integrators

Leonard Pomata

By Nick Wakeman, Staff Writer



Potential bidders for GTE Corp.'s Government Systems Division, the latest major federal information technology player on the block, include many of the same systems integrators eyeing Boeing's Information Services unit, analysts and industry officials said.

The group includes Computer Sciences Corp.,Electronic Data Systems Corp., General Dynamics Corp., IBM Corp, Litton-PRC Inc., Lockheed Martin Corp, Northrop Grumman Corp. and TRW Inc.

"We'll certainly look at GTE, but everybody has to look at it," said Philip Odeen, executive vice president and general manager of TRW's Systems and Information Technology Group, headquartered in Fairfax, Va.

"We expect to do acquisitions in 1999," said Odeen, who is looking at deals ranging in the tens of millions of dollars to "quite large." But he would not comment on whether TRW is planning to make a bid for the GTE unit. "It's way too early to speculate about anything."

He said TRW's recent $7 billion acquisition of LucasVarity Plc, a London-based automotive and aerospace company, will not preclude his division from making acquisitions. During the past year, his unit has digested the $1 billion acquisition of BDM International Inc. of McLean.

GTE's move follows that of Boeing Co., which is shopping its IT Group to focus on its core lines of business. Irving, Texas-based GTE slapped the for-sale sign on its IT unit because the company wants to focus on commercial telecommunications markets.

In addition to selling the government unit, GTE is selling 1.6 million access lines and divesting its Airfone subsidiary. GTE hopes to raise a total of $3 billion to be used for investing in high-growth areas, such as wireless and integrated voice and data technologies.

The IT unit, which has 7,000 employees and four divisions, generated revenue of $1.4 billion or about 5 percent of GTE's overall $25 billion in 1998. GTE has hired investment banking firm Bear, Stearns and Co. of New York, to handle the sale.

"The buyer will probably be someone that is in a different segment than us ... someone who is not necessarily heavily into electronics but wants to get into that area with a bang," Armen Dermardersosian, GTE's executive vice president of technology and systems, told Washington Technology.

GTE has received numerous inquiries from potential buyers and also has directly contacted companies it thought might be interested, said Dermardersosian, who would not be more specific. The sale "will probably be completed in the third quarter of 1999," he said.

Because of the unit's defense tilt, the buyer is likely to be a company whose primary focus is defense or that wants to be a major player in that market, he said. The unit provides systems and network integration, telecommunications, information and intelligence systems and tactical and strategic communication systems for defense, intelligence and civilian agencies.

"The government system division is a good business, and it has performed well, but its profile just doesn't fit the future direction of GTE," said Jonathan Catherwood, a partner with the investment banking firm Boles, Knop & Co. of Middleburg, Va. Catherwood is a former vice president of corporate strategies for GTE. He left the company in March to join Boles, Knop. "The company also wants to raise a cash war chest," he said.

GTE will focus its investments on the commercial sector because the government market is growing at a significantly slower rate, Dermardersosian said.

"If we stayed at GTE, we would be shortchanged on investments and on corporate attention," he said. "So the best thing for GTE and for the government systems division is to try to reposition us with someone else."

The search for a buyer is focusing on companies that will keep the unit whole. "The last thing we want is to go to someone who will strip us clean," he said.

Paul Tucker, CSC's vice president for corporate development, would not comment on specific acquisitions plans for his company, but did say that CSC's acquisition strategy includes both government and commercial targets.

Most of El Segundo, Calif.-based CSC's acquisitions are in the $50 million to $100 million range, though the company has considered some over $1 billion, he said.

"We are looking for high level, high quality, high value organizations," he said. "We are looking for companies that are more into systems integration and application development and less into components and brute-force programming."

Leonard Pomata, president of Litton-PRC, McLean, Va., said GTE could make an attractive acquisition because of its communication capabilities, but he would not comment on whether PRC is considering a bid.

PRC and GTE are partners on a National Weather Service contract. "We have a good capability in communications, but we rely on GTE to get us to the next level," he said.

Overall, acquisitions are an important part of PRC's growth strategy and a way for the company to add new customers and flesh out its capabilities, he said.

Douglas Schmidt of Legg Mason Inc. of Baltimore said the ultimate buyer of the GTE unit is going to have to be someone who understands the government market.

"My guess is that it will be an aerospace company," Schmidt said.

Spokesmen for two leading aerospace companies, Lockheed Martin of Bethesda, Md., and Northrop Grumman of Los Angeles declined to comment on their plans.

"We do not discuss any acquisition plans," said James Fetig, director of national media relations for Lockheed Martin.

Lockheed would be a surprise buyer, said Paul Nisbet, an analyst with JSA Research of Newport, R.I. "They are having enough trouble digesting what they have already done," he said.

Northrop Grumman spokesman Robert Koch would not comment on acquisitions.

But Kent Kresa, Northrop Grumman's president and CEO, said in June 1998 that IT is a core growth area for the company and that acquisitions are part of the company's strategy.

General Dynamics spokeswoman Norine Lyons also would not comment. General Dynamics of Falls Church, Va., formed an IT division in April 1998 as its third major operating unit. The unit was built from acquisitions.

General Dynamics CEO Nicholas Chabraja has said that he will continue to look for investments that will strengthen the company's core lines of business.

"General Dynamics has made some significant IT acquisitions," Nisbet said. It bought Ceridian's Computing Devices International of Bloomington, Minn., in November 1997 for $600 million. In October 1997, the company bought Lucent Technologies' Advanced Technology Systems unit for $267 million.

Part of General Dynamics $450 million deal to buy Lockheed Martin's Defense Systems and Armament Systems units went to the IT division.

GTE's size and markets will attract a lot of attention, said Jon Kutler, president of Quarterdeck Investment Partners of Los Angeles. But the company likely will not get a multiple as high as one-times revenue, he said.

Prices are being pushed down because the number of information technology companies being sold is on the rise, Kutler said.

Schmidt said that in addition to Boeing and GTE, there are at least two other IT services companies with revenues over $100 million on the block.

"I don't think it's the greatest thing that all these folks are showing up at once," Schmidt said. "It crowds the market and makes it harder for deals to get done."

Reader Comments

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above

What is your e-mail address?

My e-mail address is:

Do you have a password?

Forgot your password? Click here
close

Trending

  • POWER TRAINING: How to engage your customers

    Don't miss our Aug. 2 Washington Technology Power Training session on Mastering Stakeholder Engagement, where you'll learned the critical skills you need to more fully connect with your customers and win more business. Read More

  • PROJECT 38 PODCAST

    In our latest Project 38 Podcast, editor Nick Wakeman interviews Tom Romeo, the leader of Maximus Federal about how it has zoomed up the 2019 Top 100. Read More

contracts DB

Washington Technology Daily

Sign up for our newsletter.

Terms and Privacy Policy consent

I agree to this site's Privacy Policy.