Northrop Grumman to Buy Federal Data

Northrop Grumman to Buy Federal Data<CR>

By Nick Wakeman, Senior Editor

SEPT. 6 ? Northrop Grumman Corp. is acquiring computer reseller Federal Data Corp. of Bethesda, Md., in a $302 million deal that will give Los Angeles-based Northrop Grumman a significant presence in the reseller business and bring new civilian government customers.

Northrop Grumman's Logicon unit will absorb FDC, which had $584 million in 1999 revenue. The acquisition is a combination of $127 million in cash, the assumption of $157 million in debt and $18 million in other transaction costs.

The deal is expected to close in about 45 days following regulatory review.

"This is a great day for us," said Herbert Anderson, president and chief executive of Logicon, based in Herndon, Va.

With the addition of FDC, Logicon will have annual revenue of more than $2 billion for 2000. In 1999, Logicon's revenue was $1.4 billion.

FDC brings new customers to Logicon, such as the National Institutes of Health, Federal Aviation Administration and the Department of Veterans Affairs. It also enlarges Logicon's footprint with agencies such as NASA, Anderson said.

Of FDC's $584 million in 1999 revenue, about $400 million comes from reselling information technology products from companies, such as Cisco Systems Inc., Hewlett-Packard Co. and Sun Microsystems Inc.

Anderson said the reselling business may have low margins, but its benefits include a strong cash flow and a good return on investment. The combination of Logicon's $200 million in reseller business with FDC's reseller business was a major reason for the acquisition, he said.

Logicon's reseller business is mostly in software, such as Oracle software products. FDC will bring the hardware reselling business. "It all fits just like a glove," Anderson said.

However, FDC's reselling business may be one reason it took FDC's owner, the Carlyle Group of Washington, several months to sell the business, analysts said.

Other potential suitors looked at FDC but were not interested in buying it in one piece, said John Allen with the investment bank Quarterdeck Investment Partners of Los Angeles. Instead, buyers were more interested in FDC's services business, he said.

"It has been on the market for awhile," said Thomas Meagher, vice president of equity research for BB&T Capital Markets of Richmond, Va.

Low margins are the biggest deterrent to companies buying a reselling business, he said.

FDC CEO Daniel Young defended his business saying that many who look at the reseller business fail to realize that selling products can drive the services business.

"Products pull services particularly when you are selling in the networking arena," he said.

Networking is one of FDC's strengths. The company is providing seat management services at Wright-Patterson Air Force Base and for the Peace Corps. FDC also has been named Cisco's top federal partner for each of the past three years.

The Carlyle Group began shopping FDC in January, Young said. The investment group typically holds onto its properties for five to seven years before looking for an exit strategy. Carlyle bought FDC in 1995, so "we had reached the five-year mark," Young said.

How FDC will be integrated into Logicon has not been decided, Anderson said.

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