Let's Make a Deal: Mergers, Acquisitions Abound
Let's Make a Deal: Mergers, Acquisitions Abound
By Nick Wakeman, Staff Writer
Dozens of deals are in the works for the first quarter of 1999 as merger and acquisition activity heats up in the federal information technology market.
At least four companies with more than $150 million in annual revenues are on the block, including large properties like GTE Government Systems Division with $1.4 billion in revenue, and Boeing Information Systems with $250 million to $350 million in revenue.
But most of the activity is among companies with less than $100 million in revenue, according to analysts and industry officials.
In one of the latest deals, systems integrator AverStar Inc. of Burlington, Mass., signed a pact Feb. 11 to buy Computer Based Systems Inc. of Fairfax, Va.
Terms of the deal were not disclosed. Computer Based Systems had 1998 revenue of $40 million and 600 employees. The acquisition is expected to close by the end of this month.
"You are seeing consolidation activities across the whole spectrum of companies," said Richard Knop of the investment banking firm, Boles, Knop & Co. of Middleburg, Va.
Companies shopping for deals include big names like Computer Sciences Corp. and Science Applications International Corp. and small start ups like SI International Inc.
Midrange companies like Affiliated Computer Services, CACI International, Federal Data Corp., and SRA International also are in the hunt.
Companies like CSC of El Segundo, Calif., and SAIC of San Diego already have multibillion-dollar bulk behind them but look for deals to add new customers and new capabilities, company officials said. These companies also have used acquisitions to build their commercial businesses.
"We haven't needed to buy or die [in the government market,]" said William Roper, chief financial officer for SAIC. "We've been participating in an opportunistic manner to fill niches."
In January, SAIC scooped up EnerLink, a business unit of Southern Co. of Atlanta that develops energy analysis software. Terms of the deal were not disclosed.
When systems integrator Federal Data Corp. began its shopping spree in 1995, company president Dan Young said the goal was to reach $500 million in sales.
"I thought that was the size you had to be to be a player. Boy, was I wrong," he said. The level now is $1 billion or higher, he said.
FDC, through six acquisitions, has now reached the $600 million a year mark in revenue.
The company is eyeing acquisitions in the $150 million range and expects to close on one or two deals in the coming year, he said.
"It's as difficult to integrate a $30 million acquisition as a $200 million one, so you're better off doing the larger deal," he said. "But we still look for niche opportunities."
Federal Data Corp., which is owned by the cash-rich Carlyle Group of Washington, has finessed a growing trend in the federal market: rolling up smaller companies to create a larger company.
The federal information technology market with its slow growth trends does not often attract IT companies from the commercial sector as potential buyers, said Douglas Schmidt of the investment firm Legg Mason Inc. of Baltimore.
"But you do find the equity groups," he said. "They are always looking for new territories."
The Carlyle Group, which had a large stake in the former BDM International, now owned by TRW, has been the groundbreaker of the roll-up strategy in the federal space.
Others using the strategy include Golder, Thoma, Cressey and Rauner of Chicago, which is a backer of systems integrator Vista Information Systems of Herndon, Va., and Frontenac of Chicago, which is backing SI International Inc. of Vienna, Va.
Ray Oleson, president and CEO of SI International, said he is planning on making one acquisition about every six months in the $10 million to $65 million range. "We want to build a full service government contractor," he said.
SI is targeting companies that do business process re-engineering, security and networking, he said.
"There seems to be an abundance of great companies with niche plays out there," Oleson said. His goal is to reach $250 million to $300 million in five years.
SI's strategy is similar to Federal Data Corp.'s roll-up plays. FDC has bought niche players such as Technical and Management Assistance Inc. of Absecon, N.J.
That $9 million deal in March 1998 added Federal Aviation Administration customers and relationships with companies like CSC and Lockheed Martin Corp.
The large number of small companies in the federal sector make it a ripe market for this kind of roll-up strategy, said Jon Kutler, president of Quarterdeck Investment Partners Inc. of Los Angeles.
"It is a market dominated by entrepreneur owners who have realized there is no future in standing still," he said.
Fallout from procurement reform, which has brought the growth of indefinite delivery, indefinite quantity contracts and the increased use of the General Services Administration schedule, has driven consolidation among the smaller companies, said Richard Weigle, a partner in Aronson, Fetridge & Weigle, an accounting and management consulting firm in Rockville, Md., that does merger and acquisition work. "It is a necessity to get bigger," Weigle said.
Part of the need to get bigger is to show strong growth, especially for a public company or a company that is considering going public, Schmidt said. For success in the public markets, companies have to show growth in the 15 percent to 20 percent range.
"So you have to steal business from other people, and you have to use acquisitions to grow in the high teens," he said.
Affiliated Computer Services of Dallas gave its revenue growth a boost when it acquired Computer Data Systems Inc. of Rockville, Md., for $373 million in December 1997.
CDSI, now known as ACS Government Solutions Group, accounted about 30 percent of ACS' overall $1.2 billion in 1998 revenue.
One reason CDSI wanted to be acquired was that company executives felt they would be relegated to a subcontractor role in the federal market if they remained independent, said Bill Woodard, president of information technology solutions for ACS Government Solutions.
"It is an unwritten rule that you have to be a certain size," Woodard said. Now that ACS is over the $1 billion revenue mark, it is looking for more niche acquisitions.
The company's goal is to grow 20 percent a year, with about half of that growth coming from acquisitions, he said.