Logicon Revs Up Acquisition Engine

Logicon Revs Up Acquisition Engine<@VM>Inside a Deal

By Nick Wakeman, Senior Editor

With back-to-back purchases this month totaling $452 million, Northrop Grumman Corp.'s Logicon unit is marching rapidly toward its goal of $3 billion in annual revenue by 2006.

In the first deal, announced Sept. 6, Logicon made a major jump in the value-added reseller business with its plan to pay $302 million for Federal Data Corp. of Bethesda, Md.

In the second deal, announced Sept. 18, Logicon is paying $150 million for Sterling Federal Systems Group, the IT services unit of Sterling Software. Sterling Software is a wholly owned subsidiary of Computer Associates International Inc. of Islandia, N.Y.

The deals will push Logicon over the $2.1 billion market in annual revenue. In 1999, Logicon had $1.44 billion in revenue.

The recent acquisition are "yet another example of our strategy to focus on our high-growth business areas," said Kent Kresa, Northrop Grumman chairman, president and chief executive officer. Overall, Los Angeles-based Northrop Grumman had $7.6 billion in 1999 revenue.

The deal making might not be over for Logicon. The unit's president and CEO, Herbert Anderson, has said he wants to double Logicon's annual revenue by 2006.

While he would not comment about future acquisition plans, Anderson said, "We continue to look at the opportunities that are out there. We have shown we are serious about acquisitions."

The deals for FDC and Sterling Federal are very different, but fit Logicon's growth strategy of building on current skills, adding new capabilities and gaining access to new customers, Anderson said.

FDC, which had $584 million in revenue in 1999 and is projected to finish 2000 with $660 million in revenue. About $400 million in reselling business, with a particular focus on networking products. FDC is the largest reseller of Cisco products in the federal market.

Anderson acknowledged that the reselling business may have low margins, but its benefits include having 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, Anderson said.

Logicon's reseller business is mostly in software, while FDC brings the hardware reselling business. "It all fits just like a glove," Anderson said.

The FDC acquisition also allows Logicon to diversify its customer base, which is nearly 60 percent with the Defense Department. FDC brings a strong civilian agency customer that includes the National Institutes of Health, Federal Aviation Administration, Veterans Affairs and NASA.

The acquisition of Sterling Federal enhances Logicon's skills in areas such as high-performance computing, document management, satellite data collection, command and control systems, and modeling and simulation, Anderson said.

Sterling Federal had about $159 million in 1999 revenue and brings new customers at the Federal Aviation Administration and several intelligence agencies.

Anderson said about 25 percent of Sterling's business is with intelligence agencies and another 20 percent is in air traffic control systems, which is a new market for Logicon.

"When we put our technology and services together with what they have, we should be able to go after several things we couldn't before," he said.

"With Sterling, they are picking up some really high-end technical people," said Jean Stack, senior associate with the investment banking firm Houlihan Lokey Howard & Zukin of McLean, Va.

Both the FDC and Sterling acquisitions show that Logicon is expanding its reach into new customers and capabilities, she said.

It was not surprising that Computer Associates wanted to sell Sterling Federal because what that unit did was very different from the rest of Sterling and the rest of Computer Associates, Stack said. "It was an odd duck," she said.

Sterling Federal and Logicon fit well together, she said.

The FDC acquisition brings Logicon more capabilities in key areas such as networking, desktop outsourcing and security, said Richard Knop of the investment banking firm Boles, Knop & Co. of Middleburg, Va.

"They also are picking up a large direct sales force," Knop said. "This is an excellent acquisition that allows Logicon to be a full-service IT provider."

FDC's reseller business is concentrated in the higher-end products, such as networking equipment. "They don't just sell things off the shelf," Knop said.

But 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 of investment bank Quarterdeck Investment Partners of Los Angeles. Instead, buyers were more interested in FDC's services business, he said.

Low margins are the biggest deterrent to companies buying a reselling business, said Thomas Meagher, vice president of equity research for BB&T Capital Markets of Richmond, Va.

Splitting FDC apart would have been very difficult, Knop said, because the services and the product businesses were very intertwined.

FDC's 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.

"They are our largest federal reseller in terms of volume," said Tom Gillman, acting director of channels for the Cisco federal unit.

Being part of Logicon will allow FDC to pursue larger and more geographically dispersed opportunities, especially as the government outsources more enterprise networks, he said.

"The government needs a partner that handles more than just product fulfillment," he said.

FDC already had strong services
capabilities, said Gillman, who added
that the acquisition by Logicon will strengthen an already strong partner for Cisco.

"From our perspective, this is a very positive move," he said.

LogiconFederal Data Corp.Sterling Federal Systems

Herndon, Va.

1999 Revenue:
$1.44 billion

Advanced IT services

Command and control, weapons systems, information systems, training and simulation, base and range support

Customers: Defense Department, Army, Navy, Air Force, civilian

Bethesda, Md.

1999 Revenue:
$584 million

Value-added reseller and IT services

Reselling, network engineering and support, software engineering, systems integration

NASA, Veterans Affairs, Federal Aviation Administration, State Department, Internal Revenue Service, Navy

Sale price:
$302 million.

McLean, Va.

1999 Revenue:
$159 million

Advanced IT services

Intelligence systems, command and control, air traffic management, weather systems, modeling and simulation

Intelligence agency, Air Force, FAA, NASA, National Security Agency, National Oceanic & Atmospheric Administration

Sale price:
$150 million

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