Software Makers Add Federal Might With New Buys
Software Makers Add Federal Might With New Buys
By Richard McCaffery, Staff Writer
Computer Associates International Inc. and Axent Technologies Inc. will gain key partnerships with systems integrators, new technologies and greater bulk in the federal government market with their planned acquisitions.
Islandia, N.Y.-based Computer Associates, which has offered to buy Platinum Technology Inc. for $3.5 billion, has been pushing to grow its services business since its unwanted bid to buy Computer Sciences Corp. fell through last spring.
If the deal goes through, Platinum will bring its large services division as well as relationships with 13 major systems integrators to CA. Both companies make a wide range of network management software.
"Platinum gives us additional strength," said Yogesh Gupta, Computer Associates' senior vice president of product strategy. "Federal contracts are huge and we're not in the same league as those big federal integrators. I really expect to continue to push those partnerships in the federal government."
Rockville, Md.-based Axent also is adding integrator partners with its purchase of PassGo Technologies for 1.5 million shares of stock. In addition, PassGo has been pushing to grow its federal business for the last 12 months. Axent makes security products such as intrusion detection and prevention software.
PassGo, which also makes security software, has joint marketing programs with Arthur Andersen of Chicago and Ernst & Young International of New York. Consulting is a critical ingredient for computer security companies since integrating the software is so complicated.
"Those are additional partners we think add value to the business," said Greg Coticchia, Axent's vice president of marketing. "Building relationships is a key part to getting products to market."
Industry consolidation and the need to constantly upgrade technologies drove both acquisitions, company officials and analysts said. Consolidation has been sweeping the software industry for more than a decade.
Platinum of Oakbrook Terrace, Ill., has bought more than 50 companies since 1994. Computer Associates has bought nearly 60 companies over the last two decades and Axent has bought five companies in the last year two since January.
Investors gave thumbs up to the Computer Associates deal and thumbs down to the Axent deal. Computer Associates' stock moved up $3.06 a share to close at $37 the day the purchase was announced, whereas Axent lost more than one-third of its value in the wake of its purchase, after two analysts downgraded the stock.
Then things went from bad to worse. On April 5, Axent braced analysts for a first quarter loss of 5 cents to 10 cents a share because of a slowdown in customer spending related to year 2000 concerns. It will be the first time in 11 quarters that Axent has missed its numbers. The company also downgraded sales forecasts for all of 1999, cutting revenue expectations from a possible $150 million to as low as $120 million.
Its stock has dropped from more than $30 a share in late March to less than $10 in the first week of April, making it a takeover target for companies like IBM Corp. and Hewlett-Packard Co., said Roy Lobo, an analyst at Moors & Cabot Dakin of San Francisco.
In less than one week the Axent/PassGo deal, which closed in late March, plunged in value from about $50 million to about $12 million. Axent's market value has dropped from nearly $1 billion to less than $300 million.
Even analysts like Lobo, who expected Axent to struggle this year as a result of the year 2000 problem, did not expect such a steep drop. "It's surprising Y2K has taken them down that much," he said.
Axent is not the only company in the security industry to pre-announce weak earnings. In late March, Secure Computing Corp. of San Jose, Calif., warned investors of a similar shortfall, Lobo said.
"We've just been hit awfully hard," John Becker, Axent's chairman and chief executive, said about the company's stock plunge. "I believe we've got the proper strategy. We just need to stay the course and keep executing."
Meanwhile, the CA/Platinum deal must pass a vote by shareholders as well as get the nod from federal regulators. Computer Associates officials expect the deal will close in about 60 days. If it does, the company gets Platinum's data warehousing, data mining and security technology, as well as its pool of integrators.
"It's a very, very good acquisition for us,'said Michael Miller, senior vice president and general manager of Computer Associates' North American sales. Platinum's database management tools will give CA new products and markets in the government, Miller said. "There's very little product overlap," he said.
Computer Associates' federal business is split between the Defense Department and the civilian agencies, Miller said. Customers include the Army, Navy and the Postal Service. The company works primarily with four integrators: Science Applications International Corp. of San Diego, Inacom Corp. of Omaha, Neb., Electronic Data Systems Corp. of Plano, Texas, and Computer Sciences Corp. of El Segundo, Calif.
Platinum works with 13 integrators, including Lockheed Martin Corp. of Bethesda, Md., Raytheon Co. of Lexington, Mass., TRW Inc. of Cleveland, Northrop Grumman Corp. of Los Angeles and Boeing Co. of Seattle.
More and more, Computer Associates is developing products that require heavy integration and the Platinum deal will help with this, said Christopher Mortenson, managing director at BT Alex. Brown of New York.
"CA is trying to build that capability both internally and by working with systems integrators," Mortenson said. "Platinum has their own services unit as well as relationships with integrators."
Computer Associates' Global Professional Services unit, formed in the wake of its failed bid for Computer Sciences, has grown from zero to 3,000 employees in the last 12 months. Platinum will add another 1,000 employees to the professional services unit, said Gupta, who noted that CA will have its work cut out for it in 1999. Platinum is the largest acquisition CA has attempted in terms of number of employees. Platinum has over 4,000 workers and CA has over 13,000.
Platinum has a strong presence in the intelligence community, at the Army, the Postal Service and the Department of Commerce, according to Jim White, senior vice president of Platinum's software division, who previously led Digital Equipment Corp.'s government business. Compaq Computer Corp. of Houston bought Digital for $9.6 billion last June.
The acquisition comes at a good time for Platinum. The network management software maker has seen its stock drop from nearly $35 last summer to less than $10 before news of the acquisition. Though its 1998 sales grew 55 percent to nearly $1 billion, the company reported a loss of $2.5 million for the year.
So in February Platinum announced a restructuring plan to improve operations and boost profitability that includes cutting 1,000 jobs, closing offices, streamlining product development and halting acquisitions.
Platinum does not disclose its government revenue but White said it is about 8 percent of the company's total business. He expects it to grow to 10 percent this year in part because of the company's new services division, which was formed in January. In the first quarter alone, Platinum has grown its new government services division from nothing to $2 million, White said.
Computer Associates' government revenues are a little more than 5 percent of the company's sales, which totaled $4.7 billion in 1998.
No question Axent makes PassGo bigger and teams it with a growing, publicly held company. Axent had $101 million in 1998 sales and until recently had a market value of nearly $1 billion.
The company has 634 employees, which includes 104 from PassGo. Axent's government business is an even mix of civilian and military agencies. Between 5 percent and 10 percent of Axent's revenue comes from the government. Customers include the Air Force, Defense Information Systems Agency, Environmental Protection Agency and Federal Emergency Management Agency.
The PassGo acquisition gives Axent new technology to market to government customers, and Axent gives PassGo a broader distribution channel, Becker said.
In March, Axent forged an agreement with CACI International Inc. of Arlington, Va. CACI, a systems integrator with a large government presence, will help government and commercial partners integrate Axent's security products. "I think we'll be able to provide channel partners, a direct sales force and consulting services," to PassGo's product line, said Becker, who expects robust growth to return next year. "We believe security will be the next Y2K," he said.
Kama Krishna, senior technology analyst at Laidlaw Global Securities Inc. of New York, agreed that Axent will be in a good position to compete once the year 2000 challenge is over. But he downgraded the stock in January from long term buy to hold because of Y2K. "It's an industrywide problem," he said. "I think Axent is a very well run company."
Founded in 1983, PassGo makes single sign-on password security software, which gives employees access to applications throughout the network using just one password.
PassGo has a sales office in Pittsburgh and has been pursuing government customers in the United States for one year, said Ann Palermo, vice president of worldwide marketing for PassGo.
The company, which had about $14 million in revenue last year, has not won any big deals yet but has worked with the Environmental Protection Agency, the Army and Air Force Exchange and the Navy's Federal Credit Union. PassGo was awarded a General Services Administration schedule last year.
Overseas, PassGo has worked with government agencies in England, France, Switzerland and Germany for over a decade. About 15 percent of the company's business is with government agencies, Palermo said. "We've been laying the groundwork in the federal government for the last year," she said. "It's an important area for us because our product is targeted to large organizations."