Firms Reel In Talent Through Acquisitions

Firms Reel In Talent Through Acquisitions<@VM>Taking the Reins: John Kost

Bill Roper

By Cindy O'Hara, Staff Writer


The tight labor market in the information technology marketplace is fueling mergers and acquisitions among services companies in the government sector, a trend that is likely to accelerate in the coming year, analysts and industry officials said.

In the midst of a nationwide shortage of skilled IT workers, which the Information Technology Association of America estimates to be about 346,000, it is little surprise that companies are scurrying for talent in hot areas such as electronic commerce, software engineering and network engineering.

One large systems integrator that acquired more technical depth through a recent acquisition is San Diego-based Science Applications International Corp., which finalized its purchase of Boeing Information Systems of Vienna, Va., in July 1999.

"Companies like SAIC buy companies like Boeing IS because there is a shortage of IT workers," said Bill Roper, chief financial officer of SAIC. "It's one way to acquire highly skilled, well-educated people."

The deal added more than 1,000 people with skills in telecommunications and network management to SAIC's 38,000-employee base. For the fiscal year ending Jan. 31, 1999, SAIC had $4.7 billion in revenue.

In another case, the purchase of GTE Information Systems LLC by Reston, Va.-based DynCorp allowed the systems integrator to broaden not only its business base, but also its pool of expertise, said Robert Kipps, vice president of Houlihan Lokey Howard & Zukin, McLean, Va.

DynCorp clearly was focused on increasing its IT and networking business, Kipps said, which is why that acquisition was so critical for them.

The acquisition of the GTE unit, which was finalized last December, has positioned DynCorp to undertake more high-end telecommunications and network outsourcing projects in the government market, a DynCorp official said.

DynCorp added 925 people with skills in areas such as wireless and satellite communications and electronic business to its 16,000-employee base. More than 95 percent of DynCorp's $1.4 billion revenue comes from the federal government.

Paul Lombardi, president and chief executive of DynCorp, said his company now can compete with the likes of Computer Sciences Corp., Electronic Data Systems Corp., Litton-PRC, Lockheed Martin Corp., and SAIC, thanks to several Defense Information Systems Agency contracts and the seven-year, $500 million Justice Consolidated Office Network contract the GTE unit won in 1996.

Lombardi's vision for DynCorp is one of a total solutions supplier, but he acknowledged that there were "a lot of gaps" before the GTE acquisition. "We were weak in network engineering, e-commerce and Web-enabled solutions, as well as wireless communications," he said.

There are several motivations for mergers, not the least of which is to get new customers and market niches that are hard to penetrate, such as the intelligence industry and other government agencies, said Richard Knop, a partner at the investment banking firm of Boles, Knop and Co., Middleburg, Va.

Adding to government contractors' woes is that, many times, their customers are not flexible in changing the price they are willing to pay for personnel, said Kipps.

In those instances, acquisitions can be a way of surviving in an aggressive market said Cal Hackeman, partner-in-charge of the technology industry group at Grant Thornton, an accounting and management-consulting firm in Vienna, Va.

"This is a volume game, and I think we are seeing acquisitions driven from a feeling that sometimes companies need to be larger in order to survive in a competitive marketplace," he said.

Bill Loomis, managing director of the technology research group at Legg Mason Wood Walker Inc., of Baltimore, said another reason federal IT companies are so hot to consolidate is that Wall Street is requiring those companies to grow at 15 percent to 20 percent in both annual revenue and earnings, while the federal IT market is only growing at 3 percent.

Consequently, Loomis said, companies can either gain market share by taking business away from their competitors, or they can buy their competitors.

"Companies that don't have a certain capability in technology have a very valid reason to make an acquisition," he said.

Because offering stock options as a recruitment and retention tool is growing among government technology companies, these companies have to show strong growth, and acquisitions are one of the surest ways to get that growth, said Jean Stack, an analyst with Houlihan Lokey Howard & Zukin, McLean, Va.

"You really have to have equity participation if you are going to compete for employees with commercial companies," she said.

Employees want to work for a growing company that is on track either to go public or get acquired by a publicly traded company. Either result unlocks the value of the stock options, Stack said. "That is where the real excitement is."

If a company is not growing at a double-digit rate, its stock options are not going to have any value, and hence will not be a viable recruitment and retention tool, she said.

John Kost

Position

Vice president for state and local government, Siebel Systems Inc., San Mateo, Calif.


Business

Siebel, a leading supplier of customer relationship management solutions, last month extended its strategic relationship with Fairfax, Va.-based American Management Systems Inc., targeting the public sector.


First Day on the Job

Jan. 16

Age

44

Hometown

Detroit

Family

Married with two sons, ages 5 and 2
Most Recent Book
"Eat the Rich," by P.J. O'Rourke

Favorite Vacation Spot

Greek Islands

Education

? Bachelor of arts, political science, University of Michigan

? Master of public administration, Michigan State University

? State and local executive program, Kennedy School of Government, Harvard University

Career Background

Former vice president of marketing and business development for public-sector solutions, TRW Inc. Before that, senior vice president for state and local government for Federal Sources Inc., McLean, Va. Spent 20 years in Michigan state government, including chief of policy for then-Senate Majority Leader John Engler and the state's first chief information officer under Gov. Engler.


Why did you join Siebel?

"With the Y2K cloud finally behind them, I think governments are going to get serious about service to citizens.

"What Siebel has done with customer relationship management is take 'e-customer' and change it to 'e-citizen' for the public sector. We already dominate this space.

"For governments that want to move into e-business, Siebel has the right products for the right place at the right time."


What is your role going to be?

"To help set the vision for Siebel in state and local government, both within Siebel and among the customers.

"I view selling as creating working relationships. I have had some successes in government and want others to succeed as well. Through Siebel, we can help."

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