Booming Economy to Fuse Federal Deals in 2000
Booming Economy to Fuse Federal Deals in 2000<@VM>Doing Deals in 1999
"There are definitely fewer large properties out there."
By Nick Wakeman
The torrid pace of consolidation among information technology services companies in the federal market will continue in 2000, and the number of deals could top the 49 completed in 1999 worth more than $4 billion, analysts said.
Many players are hunting for companies with expertise in hot areas such as electronic commerce, software engineering and network engineering, industry experts said.
While a batch of recent deals has narrowed the field of larger candidates, even small IT companies with unique technologies, skill sets and customers, especially in the intelligence arena, can fetch good prices, analysts and industry officials said.
"It is a big market, and there are still some good companies left out there," said Douglas Schmidt, managing director at Legg Mason Wood Walker Inc. of Baltimore.
High on the list of companies expected to make acquisitions in 2000 are newer players such as Anteon Corp., Veridian Inc. and SI International Inc. These government information technology services companies join established systems integrators that also are on the prowl for acquisitions, including Affiliated Computer Services Inc., CACI International Inc., Computers Sciences Corp., Keane Inc., Litton Industries Inc., Northrop Grumman Corp., Science Applications International Corp. and Titan Corp.
SI International of Vienna, Va., which closed its third deal of 1999 Nov. 30 by nabbing the federal business of Noblestar Systems Corp. of Reston, Va., was one of the most aggressive purchasers in the federal space this year.
With that deal, which brought in $8 million in new revenue, SI has zoomed from a company with zero revenue at the dawn of 1999 to one with an annual run rate of $60 million.
SI Chairman and Chief Executive Ray Oleson said a fourth deal nearing completion will push SI's annual revenue to $110 million. The sale price for Noblestar was not disclosed.
Titan Corp. of San Diego, a fast-growing defense information technology company whose stock has soared in the past few months, also is looking to close a major deal by the end of the year, sources said. In July, Titan acquired Atlantic Aerospace Electronics Corp., an advanced defense technology company in Boston, for an undisclosed amount. And in June, Titan picked up Systems Resources Corp., a $63 million a year systems integrator in Boston. Terms of the deal were not disclosed.
"We are definitely interested in being a consolidator in the defense IT space," said Rochelle Bold, vice president of investor relations at Titan. Bold said Titan executives want the company's $330 million in IT revenue to hit $1 billion as quickly as possible. She would not comment on any pending acquisitions, however.
Titan also has been riding high of late because of its commercial food sterilization business. The company's stock price has soared from about $4.75 a share March 23 to $28.94 Dec. 6.
The speed at which one-year-old SI has grown indicates how much the market for acquisitions has changed, said Oleson. Indeed, the number and size of deals SI has closed has surprised company executives.
"I thought we would reach $130 million in the first three years, not the first year," said Oleson, who helped arrange mergers and acquisitions while serving as president of Arlington, Va.-based CACI International from 1993 to 1996.
"We used to have to generate interest [among potential takeover targets]. Now there is so much available that we have to pick and choose," Oleson said.
Data compiled by the investment banking firm Houlihan Lokey Howard & Zukin of McLean, Va., showed that the number of federal deals vaulted from nine in 1995 to 49 in 1999, an increase of 444 percent.
Most prices for federal companies have ranged from about 25 percent of revenue for resellers of products, to 100 percent or higher for companies that do software development and network engineering work, said Richard Knop, a partner in the investment banking firm Boles, Knop & Co. of Middleburg, Va.
"The same elements that drove the deals in 1999 are still in place for 2000," said Jerry Grossman, a director at Houlihan Lokey Howard & Zukin.
Consolidation is continuing to be driven by fallout from procurement reform, the changing requirements of government buyers and a booming economy that is making an abundance of capital available.
"Our industry is maturing, so it is natural to see consolidation, and I think we'll see it for the next several years," said William Woodard, president of Affiliated Computer Services Government Solutions Group in Rockville, Md. ACS entered the government market in 1998, when it acquired Computer Data Systems Inc. of Rockville. Since then, the company has made two smaller government related acquisitions.
ACS, which has about $650 million in annual government revenue, should grow at 20 percent annually with half of that growth coming from acquisitions, said Woodard, who would not elaborate on any acquisition plans.
Among the noteworthy deals of 1999 was Computer Sciences Corp.'s acquisition of Nichols Research Corp., Huntsville, Ala., for $391 million in September. That deal further narrowed the number of middle-tier federal IT companies in the market and demonstrated once again that size matters.
"That was a deal that you would not have expected in 1998," Grossman said. Nichols, which had been an acquirer in its own right, had grown to $455 million in annual revenue, but management decided it was not big enough to remain independent. "That really shows that the bar keeps rising ... you really need to be $1 billion-plus to be the prime on these large contracts," Grossman said.
Analysts also look for DynCorp's $170 million acquisition of GTE Information Systems Division to position the Reston-based company to become more aggressive in 2000, possibly going the initial public-offering route to fuel more acquisitions.
Deals by Anteon of Fairfax, Va., the Carlyle Group of Washington, SI International and Veridian of Alexandria, Va., show private equity groups continue to believe that the government market is a good place to invest their money, industry officials said.
Anteon, which is backed by Caxton-Iseman Capital Inc. of New York, bought Analysis & Technology Inc. of North Stonington, Conn., in June for $104 million. Anteon president and CEO Joseph Kampf also said his $500 million-a-year company is working on several deals going into 2000.
Veridian, which vaulted onto the scene by closing three deals in September and doubled its annual revenue to more than $600 million, is backed by two equity groups, Monitor-Clipper Partners of Cambridge, Mass., and the Texas Growth Fund of Austin, Texas.
The company is likely to be less aggressive in the coming year as it focuses on integrating its acquisitions, said David Langstaff, Veridian CEO. "But if an opportunity arises that fits our strategy and passes our standards for shared values and common cultures, then we would act," he said.
Federal Data Corp. of Bethesda, Md., one of the early consolidation players when it began acquiring companies in 1994, did not do any deals in 1999. The company completed five acquisitions in 1997 and 1998. FDC, which has about $550 million in annual revenue, is owned by the Carlyle Group.
Daniel Young, chief executive of FDC, told Washington Technology that the company spent most of 1999 integrating its earlier acquisitions. While the networking services and systems integration company is eyeing some acquisitions, it is now at a point where major deals are not as important to its growth, he said.
FDC is looking for smaller companies with annual revenue of about $50 million that can bring new capabilities, especially in networking. Said Young: "We are looking at more boutique kinds of things."
While no one expects consolidation to slow down, the nature of deals and the companies making them is changing, industry officials said.
"You are starting to see a bifurcation in the marketplace," said Jon Kutler, president of the investment banking firm Quarterdeck Investment Partners of Los Angeles. The midtier companies in the $100 million to $500 million annual revenue range are being acquired quickly so that is driving up prices, Kutler said.
At the same time, some of the more aggressive acquirers such as Anteon and Veridian are getting larger and are not as interested in acquiring companies with annual revenue under $30 million, said Thomas Meagher, vice president of research at the investment firm BB&T Scott & Stringfellow in Vienna, Va.
As a result, the companies with under $30 million in annual revenue are seeing their value drop as acquisition targets, Meagher and Kutler said.
"There are definitely fewer large properties out there," said Anteon's Kampf.
Large properties that were snapped up relatively quickly in 1999 included SAIC's $150 million deal in July to acquire Boeing Information Services, and the September purchase by General Dynamics Corp. of Falls Church, Va. of three units of GTE.
Companies on the block with more than $100 million in revenue are "hotly contested and that tends to drive prices up," Kampf said. · Getronics NV of the Netherlands buys Wang Global for $2 billion, picking up $3.1 billion in revenue, including $750 million in revenue from government work.
· General Dynamics acquires three GTE Government Sys-tems units for $1.05 billion, picking up $1.2 billion in revenue.
· Computer Sciences Corp. buys Nichols Research for $391 million, adding $455 million in revenue.
· The Carlyle Group acquires EG&G Inc. of Gaithersburg, Md., for $250 million, picking up about $500 million in revenue.
· DynCorp acquires one unit of GTE Information Systems for $170 million, adding about $235 million in revenue.
· Science Applications International Corp. buys Boeing Information Services for $150 million, picking up $300 million in revenue.
· Veridian closes three deals, buying Trident Data Systems, MRJ Technology Solutions and ERIM International, adding $322 million in revenue.
· Anteon acquires Analysis & Technology Inc. for $104 million, picking up $170 million in revenue.