Many E-Gov Start-Ups Looking for Buyers

But Integrators Prefer Alliances to Acquisitions<@VM>Alliances: A Path to Survival<@VM>Thinking the Unthinkable

Kelly Kimball

By William Welsh, Staff Writer

SDR Technologies Chief Executive Kelly Kimball was on the verge of taking his firm public at the beginning of the year when he received an unexpected call from one of his competitors, Jeffrey Fraser, chairman of National Information Consortium Inc.

Fraser told Kimball that he was troubled by the idea of the two firms squaring off against each other in the lucrative e-government market. The two providers of e-government applications, Fraser said, would fare much better together than apart.

With 60 employees and 11 government clients at the time, Kimball was not looking for a buyer. There was a time he thought he would never sell.

"We thought that we were the only ones that understood the market, and that we were going to win the race," said Kimball, who nevertheless agreed to meet with Fraser.

What Kimball discovered at the meeting was that NIC understands the importance of "public trust" to government officials, he said; that is, NIC knows how to deliver solutions in a way that enables its government customers to maintain their relationships of trust with citizens.

Consequently, a deal was struck, and the two companies announced in February that solutions provider SDR Technologies Inc. would become NIC Technologies.

"We came away from the meeting knowing that these guys not only got it, but were able to solve a problem that we couldn't solve," said Kimball, who is now president of NIC Global.

NIC's acquisition of SDR highlights what many industry officials see as a growing trend. With increasing regularity, executives who never thought they would sell their dot-com or software companies now are beating down the doors of established e-government players, looking for someone to buy or invest in their start-up ventures.

More than 10 companies have offered to sell their businesses to NIC, said Kevin Childress, chief operating officer for NIC, based in Overland Park, Kan. NIC would be one of the first places a company looking to sell would go, since the publicly owned firm not only purchased SDR Technologies, but in September 1999 acquired eFed, a leading supplier of e-procurement systems, now renamed NIC Commerce.

Another e-government company that has been approached by dot-coms looking to sell is Atlanta-based EzGov.

"These new companies are finding out that it is tougher than they anticipated," said EzGov President Ed Trimble, describing them as "companies with great relationships [with the government entities] that don't have the software to provide the solutions."

Childress and Trimble declined to name the companies looking to sell.

The scarcity of venture funding is the overriding factor driving the trend toward consolidation, according to analysts. After the stock market took a 180-degree turn in April, venture capitalists have been reluctant to invest in new companies with unproven business models. Many start-ups have canceled plans to go public.

Just as the business-to-government Internet companies discovered, government-to-citizen companies are finding the funding has dried up for e-government Web sites, said Tom Meagher, vice president of equity research at BB&T Capital Markets, Richmond, Va.

"If e-gov companies don't already have cash in hand and, more importantly, a path to profitability to show investors, then it is going to be extremely hard for them to survive in this environment," said Meagher.

These business models will not be proven until the dot-coms begin to make at least $10 million to $20 million in annual sales, said Jerry Grossman, managing director of investment banking services at Houlihan Lokey Howard & Zukin, based in McLean, Va.

The e-government companies that don't get follow-on financing "will look to close down, merge or go somewhere else," said Chuck Hansen, president and chief operating officer of Hansen Information Technologies of Sacramento, Calif.While many e-government start-ups would welcome tender offers from the large systems integrators and Big Five consulting firms, the major players are not rushing to make purchases.

Instead, they are forming strategic alliances and partnerships with new dot-coms and software companies as a way to tap into their e-government expertise without taking on the financial risk of long-term losses, which are too hard on the bottom line of public companies trying to pump up their stock prices.

"I believe it would be difficult for a systems integrator that is a publicly traded company with quarterly expectations on earnings to make a meaningful acquisition at this point in time with an evolving business model in this space," said Mike Daniels, president of global government solutions at Systems and Computer Technology Corp., Malvern, Pa. Daniels' company has formed an alliance with Netgov.com of Chicago.

Grossman agreed, saying that this type of acquisition "would be dilutive" for systems integrators.

Alliances, however, provide a test period for both sides to work together on projects and become familiar with each other's processes.

This is a familiar business relationship for systems integrators accustomed to working alongside other businesses as either a prime or a subcontractor. An alliance of this sort might eventually develop into "an actual business combination," said Grossman.

It's a mutually beneficial relationship, according to Kimball. "If I am an integrator, then I want to look like a dot-com. But if I am a dot-com, then I need credibility [from a systems integrator]," he said.

Teaming with one of the Big Five consultants "brings a lot of stability to the team," Hansen added.

He expects a lot of crossover between dot-coms and Big Five consultants because of their expertise implementing Government Accounting Standards Board Pronouncement Number 34, an accounting tool that helps government entities get an accurate inventory of existing infrastructure.

Hansen's company does not have any formal business partnerships with the Big Five firms, but works with them on a project-by-project basis, he said. The company, however, has formed an alliance with Unisys Corp.

These partnerships are a significant departure from traditional relationships, such as joint bids, reseller agreements and teaming agreements that systems integrators have done in the past with small- and medium-sized firms, said Paul Hudecek, AMS' senior vice president of government and education management systems group.

"As the e-government space evolved, it became apparent to us and to some other firms that some of those traditional models needed to be improved," said Hudecek. To this end, AMS seeks to partner with e-government firms that have shown themselves to be leaders in the marketplace, he said.

AMS has strategic partnerships with Ariba Inc., Siebel Systems Inc. and Versata Inc. The company also has taken an equity stake in govWorks Inc.

IBM likes its partners to "embrace our e-business framework" and to understand IBM's technology platforms and the services it offers to the e-government market space, said Craig Haseltine, IBM business development executive for global government. IBM's e-government partners include Environmental Systems Research Institute Inc., EzGov, HTE Inc. and JPH International Inc.

Some dot-coms, however, are leery of alliances and partnerships.

"Why go in with IBM, Dell, Compaq and charge their rates when they are still trying to push their boxes?" said Timothy Bartlett, president and CEO of eGovNet of Columbus, Ohio.

A company can lose its competitive edge when it goes in with a large, publicly traded company, he said.

Consequently, eGovNet strives for partnerships with local companies, something that Bartlett said has great appeal to its government customers.

The jury is still out, however, on the efficacy of these e-government alliances. That depends on whether "the two companies come together and create something better than they could do on their own," Kimball said.Not everyone is thinking about selling or being acquired ? at least not yet.

Agust Gudmundsson, president and CEO of Govt.com in Lewisburg, W.Va., believes the e-government marketplace will continue to expand, making room for more companies like Govt.com. He cites research by the GartnerGroup and others that indicates less than 1 percent of the state and local market has been penetrated and less than half of that fully delivered.

Govt.com, which provides government customers with both a front-end Web portal and software for the back office, has more than a dozen customers, making it about the size SDR Technologies was when it was sold.

And with more than 500 customer leads to pursue, the firm is growing so fast, it doesn't have the sales staff to keep up, Gudmundsson said.

"The market is definitely not saturated," he said. "There will not be an early shakeout."

Ezgov's Trimble generally agreed, saying the market is "still expanding, yet more slowly than earlier this year."

San Diego-based simplegov.com incorporated in January while funding prospects were still good.

Although it has not yet signed customers, its corporate officers are contemplating a role as systems integrator, said Vincent Hall, simplegov.com's president and CEO.

A merger is not part of the strategic plan for simplegov.com, but Hall said he would consider it if the proposed merger could produce results beyond what his company could accomplish on its own.

This willingness to at least consider what some regard as unthinkable permeates a lot of the smaller firms entering the e-government space.

While Bartlett, for example, is focused on solidifying eGovNet's place in the government arena, he wouldn't rule out selling the company if the offer was right.

"It is not our intention to sell this company, he said. "But you never say never."

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