Affiliated Computer Services To Purchase Intellisource

Affiliated Computer Services To Purchase Intellisource<@VM>Affiliated Computer Services Inc.

Michael Berta

By Nick Wakeman, Staff Writer

Affiliated Computer Services Inc. of Dallas plans to give its outsourcing capabilities a shot in the arm by acquiring the Intellisource Group of Vienna, Va.

Terms of the deal, which was still pending at press time, were not disclosed, but ACS is picking up about $108 million in new revenue and about 700 employees. Intellisource customers include NASA, the Federal Aviation Administration, the Air Force, the Coast Guard and the cities of Newark, N.J., and Philadelphia.

Executives from both companies declined to comment on the acquisition.

"Intellisource is a fine company with lots of good employees and customers," said William Woodard, president of the ACS Government Solutions Group. "But our policy is not to talk about [merger and acquisition] activity prematurely."

The deal follows ACS' pattern of making acquisitions that broaden its customer base and expand its capabilities.

Intellisource went on the market as part of a divestiture strategy by its majority owner, Safeguard Scientifics Inc. of Wayne, Pa., a source said. Safeguard had $3 billion in 1999 revenue.

The company invests in and helps develop technology companies, primarily in the Internet infrastructure market. Safeguard invested in Intellisource, which was then known as RMS Information Systems, in 1996.

Intellisource President and Chief Executive Michael Berta said in an interview last year that Safeguard was grooming Intellisource for a public offering. He could not be reached for comment on this story.

Intellisource does not fit Safeguard's Internet strategy, and Safeguard has been trying to tighten its portfolio of companies, prompting the sale, a source said.

"This would be a good pick-up for ACS," said Thomas Meagher, vice president of equity research for the investment banking firm BB&T Capital Markets, a division of Scott and Stringfellow Inc. of Richmond, Va. "This is ACS' latest move in terms of becoming a powerhouse, particularly in the government market."

In its fiscal 1999, which ended June 30, 1999, ACS had $1.64 billion in revenue. For the first nine months of its fiscal 2000, ACS hit $1.43 billion compared to $1.2 billion for the same period a year earlier. Revenue from government customers represents about one-third of ACS' total revenue.

The company's stock has been trading from a high of $53 to a low of $31 over the past 12 months. On May 26, the stock closed at $32.88.

ACS has been an active acquirer of government IT companies since buying Computer Data Systems Inc. of Rockville, Md., in December 1997. Other federal market-related deals include Analytical Systems Engineering Corp. and Betac Corp.

ACS also has made several state and local related acquisitions such as the acquisition in February of Birch & Davis Holdings Inc., a health care management and consulting firm, and the acquisition in October 1999 of Consultec LLC, a company that processes Medicaid and welfare benefits for state governments. Those deals bolstered ACS' presence in the state health care and welfare markets.

ACS Government Solutions Group, based in Rockville, offers a wide range of IT services that include business process outsourcing, IT outsourcing, information assurance and systems integration.

In an earlier interview, Woodard said his goal is for the government unit to grow by 20 percent a year, with about half of that coming from acquisitions.

The federal acquisitions have allowed ACS to bid on larger outsourcing projects, said John Allen from the investment banking firm Quarterdeck Investment Partners of Los Angeles.

"I don't think the government has even begun to outsource, so the long-term growth is there," Allen said, citing the high rate of government workers retiring. "With this job market it is hard to replace those people, so the government is going to have to turn to outsourcing."

Federal Sources Inc., a McLean, Va., market research company, estimates that outsourcing by the federal government will grow from $3.5 billion in fiscal 2000 to $4.6 billion in 2001, a growth rate of 31 percent.

With the acquisition of privately held Intellisource, ACS gains access to the $13 billion NASA Outsourcing Desktop Initiative contract that Intellisource won along with six other companies in June 1998. That contract is open to all government agencies looking to outsource their desktop computers and related services.

Intellisource has won the first task order under that contract to provide desktop outsourcing services at NASA's Goddard Space Flight Center. The company also is a subcontractor to Science Applications International Corp. of San Diego for its desktop outsourcing work at NASA's headquarters in Washington.

Intellisource also is a subcontractor to Lockheed Martin Corp. of Bethesda, Md., on the Consolidated Space Operations Contract, a $3.4 billion outsourcing contract with NASA to manage data collection, telemetry and communication operations supporting its Earth-orbiting satellites, planetary exploration and human space flight activities.

In the state and local market, Intellisource in February won a recompete of a contract for desktop outsourcing services for the city of Philadelphia. The value of that contract was not available, but Intellisource has been providing the services there since 1998 and has saved the city $900,000 in operations costs annually, according to a company press release.

Affiliated Computer

Services Inc.

Business: IT and business process
outsourcing, systems integration, information assurance, electronic commerce

Founded: 1988

Employees: 14,000

1999 Revenue: $1.64 billion

1999 Net Earnings: $86.2 million

1998 Revenue: $1.19 billion

1998 Net Earnings: $63 million

Ticker: ACS on the New York Stock

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