Anteon, SI International Lead New Round of Deals

Anteon, SI International Lead New Round of Deals

Richard Knop

By Nick Wakeman, Senior Editor

Some familiar players in the mergers and acquisitions game are on the verge of closing more deals, signaling a continued brisk pace of deal-making among government information technology companies.

Anteon Corp. of Fairfax, Va., is less than a week away from closing one deal and about a month and a half away from a second, while SI International Inc. of Vienna, Va., is set to close an acquisition within 40 days and plans to make a deal every four months, according to officials with both companies.

Companies from other industries, such as defense and telecommunications, also are looking at IT companies as possible acquisition targets.

"We see a universe of buyers in four categories: the traditional federal services providers, financial buyers backed by an equity group, hardware companies looking to grow their IT services, and commercial companies that do government business," said John Allen with the investment banking firm Quarterdeck Investment Partners Inc. of Los Angeles.

Add to that list telecommunications companies, such as AT&T Corp., Sprint Corp. and Winstar Communications Inc., said Richard Knop of the investment banking firm Boles, Knop & Co. of Middleburg, Va.

"They want to build up their service offerings and outsourcing abilities," Knop said.

Other companies expected to make deals over the next 12 months include Affiliated Computer Services Inc., CACI International Inc., Northrop Grumman Corp. and Science Applications International Corp.

While building bulk and critical mass still is very important in the government marketplace, companies now are targeting acquisitions to gain access to customers or add new capabilities, Knop said.

Indeed, Anteon's President Joseph Kampf said his company's target acquisitions are below $100 million in annual revenue, smaller than they were in the past when he was building his company through acquisitions in the $100 million to $200 million range.

Privately held Anteon made its last acquisition in June 1999 when it bought Analysis & Technology Inc. for about $104 million. Analysis & Technology had annual revenue of $170 million.

Anteon, which has made three acquisitions since 1997, should have more than $500 million in 2000 revenue.

The two deals Kampf has in the works are for an IT services provider and an electronic government and enterprise resource planning company, he said.

Anteon, which is backed by the investment group Caxton-Iseman Capital Inc. of New York, always has made acquisitions with a strategic goal in mind, Kampf said. The hot areas he is targeting now include information assurance, network design, network communications and operations and "everything in the e-gov world," he said.

Likewise, at SI International, Chairman and Chief Executive Ray Oleson said his company has reached a size ? about $150 million in annual revenue ? that represents a solid base from which to grow.

"We have become more selective, and we are now filling out particular needs," he said. Oleson said he is looking at companies that can build capabilities in areas such as telecom and IT infrastructure. "That's a hot area for us right now," he said.

His company's last acquisition was in March, when it bought Systems Technology Associates, SI's fourth acquisition in a little over a year. Oleson said he slowed his acquisition activity at that point because he promised his staff a breather.

The breather is over now, and Oleson is targeting companies with $15 million to $30 million in annual revenue.

"I think we can do a deal every four months. The pipeline is there," Oleson said.

Another group of major players in the IT mergers and acquisitions game is defense and aerospace companies.

Large prime contractors, such as BAE Systems Plc, Boeing Co., General Dynamics Corp., Litton Industries Inc., Lockheed Martin Corp. and Northrop Grumman Corp., are reshaping and refocusing their businesses in part to be centered around IT capabilities, according to analysts and industry officials who spoke at a Strategic Research Institute conference on defense and aerospace consolidation in San Diego Sept. 24-25.

"Mergers and acquisitions have become another strategic tool for refocusing their business," said Jerry Grossman, managing director of investment banking firm Houlihan Lokey Howard and Zukin, based in Los Angeles.

Defense spending is starting to tick upward as the Defense Department looks to use IT for network-centric warfare and information superiority, said Christopher Mecray, director of aerospace and defense research at the investment banking firm Deutsche Banc Alex Brown of New York.

But the Defense Department also is bundling more contracts, which puts pressure on the small and midsize companies to be acquired or make acquisitions themselves, Grossman said.

On the acquisition front, Northrop Grumman of Los Angeles has been one of the more aggressive acquirers among the large defense companies, with its recent acquisitions of Federal Data Corp. of Bethesda, Md., and the federal unit of Sterling Software from Computer Associates International Inc. of Islandia, N.Y., said Petros Kitsos, managing director of global mergers and acquisitions for Salomon Smith Barney of New York.

"Fed Data brought them market presence [among civilian agencies], and they wanted Sterling for the technology," he said.

Northrop Grumman's IT division, Logicon Inc. of Herndon, Va., is an important growth engine for the company, said Gaston Kent, corporate vice president of investor relations for Northrop Grumman.

The company has made six IT- related acquisitions since 1997, and Logicon is expected to grow from about 19 percent of 1999 revenue of $7.6 billion to 28 percent in 2003, he said.

"We are very focused on mergers and acquisitions, but our desire isn't to just get bigger," Kent said.

The acquisitions have to fit where the company sees the government market headed, he said. Acquisitions have focused on building the company's networking and IT infrastructure capabilities and adding new customers, such as intelligence agencies and other civilian agencies, company officials said.

While deals are being made, they aren't always easy to consummate. Advanced Technology Systems, a systems integrator in McLean, Va., weathered three failed attempts at acquisitions before buying Strategic Edge Technologies of Washington Sept. 28. Terms of the deal were not disclosed.

ATS President and Chief Operating Officer Ellen Glover said the acquisitions failed because of differences between what ATS was willing to pay and the prices the target companies wanted.

ATS, which has about $90 million in revenue, is targeting companies in the $25 million revenue range, she said. SET provides software consulting and has about 30 employees. Glover declined to disclose revenue figures for SET.

Sellers' expectations may need to start coming down, analysts said. A tight debt market is making high prices difficult to finance, and sellers outnumber the buyers, so buyers can be pickier.

"Pricing has probably hit its peak, but it is still higher than it was five years ago," said Quarterdeck's Allen.

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