Acquisition pace picks up speed
Changing government market sparks buying frenzy
- By Nick Wakeman
- Nov 15, 2002
Although their company boasted nearly $1 billion in annual revenue from commercial customers, executives at Perot Systems Corp. knew it would be difficult to build a government business from scratch. Companies trying to crack the federal market can expend considerable resources developing the right contacts, establishing customer relationships and getting the right clearances and procurement vehicles -- all of which can take a lot of time with no guarantee of success.So instead, Perot Systems spent more than a year shopping for the right company before purchasing ADI Technology Corp. in July as its springboard into the market. "There was a time when if you did some good business development work, you could win some customers and build a new business," said Greg Bedner, who was ADI's top executive at the time.With the $47 million ADI purchase, Perot Systems created Perot Systems Government Services Inc., naming Bedner its president and chief executive officer, and proclaiming the new unit would "serve as the cornerstone of our government practice."Perot Systems' strategy of buying new customers and market share is being mirrored across the government market, executives and investment bankers said. Merger and acquisition activity is up sharply this year, with 73 acquisitions announced for the 12 months ended Nov. 1, compared to 46 through the same period last year, according investment bank Houlihan Lokey Howard & Zukin of McLean, Va.While the strength of the public sector is, of course, attracting new players, analysts said the major growth areas, such as intelligence, defense and homeland security, make acquisitions necessary for even established government players. That's because the agencies involved with intelligence and security typically rely on trusted partners -- companies already providing them with services -- so it's difficult for newcomers to win business. The solution is to acquire companies that already have a presence with the targeted customers.For example, Veridian Corp. of Arlington, Va., acquired Signal Corp. of Fairfax, Va., in September in part because Signal had customers in the Army, Coast Guard and civilian agencies that Veridian desired, said David Langstaff, Veridian president and CEO."Signal brings us the contracts and the key customer relationships," he said. Since the deal closed Sept. 24, Veridian won an intelligence contract with one of Signal's Coast Guard customers. While not a large contract, "it's an example of how we see the synergies working," Langstaff said.Veridian also is one of several newly minted public companies in the government space. Others include ManTech International Corp., Anteon Corp., SRA International Inc. and MTC Technologies Inc. This year they joined publicly traded government IT companies such as CACI International Inc. and PEC Solutions Inc.Investors are expecting these companies to grow revenue by at least 25 percent to 30 percent a year, but internal growth is usually just 10 percent to 15 percent, said Tom Peltier, a managing director at the investment bank Legg Mason Wood Walker Inc., Baltimore."All of these public companies have to be aggressive in their acquisitions to keep their valuations up," he said.Besides Veridian, CACI, PEC, ManTech and MTC Technologies have all made acquisitions in the past year, and Anteon has a track record of making acquisitions.At any one time, CACI is looking at eight to 10 companies as serious acquisition targets, said Ken Johnson, CACI president. The company's last deal was in October when it acquired Acton Burnell Inc. of Alexandria, Va. Terms of the deal were not disclosed, but Acton Burnell added $28.4 million in annual revenue to CACI's $681 million.The strength of the government market also is drawing new investors to the space. Besides commercial companies such as Perot Systems, equity investment groups such as GTRC and Arlington Capital Partners are becoming more active.GTRC is backing DigitalNet Inc., which will begin operations with the acquisition of Getronics Government Solutions. The $223 million deal is expected to close by the end of November."There are a lot of new buyers coming into the marketplace," said Rick Knop, co-manager member of the investment bank Windsor Group, Reston, Va.There also are a large number of companies for sale as owners look to either cash out or put their companies in a better competitive position by merging with a larger entity, said Edward Bersoff, managing director of Quarterdeck Investment Partners. Bersoff was the founder of BTG Inc., which he sold to Titan Corp. in November 2001.Johnson said: "There are more properties for sale now than I've seen in the three years I've been at CACI."But despite the large number of deals and what some describe as a feeding frenzy, most buyers are disciplined about what they are buying and the price they are paying, Bersoff said.Most of the deals are for cash, which has helped to keep prices down, said Bob Kipps, a senior vice president at Houlihan Lokey Howard & Zukin. Prices can escalate quickly when companies use their stock to make purchases."The mind-set is different with cash, so there is more inertia in the sale prices," Kipps said.Because of the government's war on terrorism, companies with customers and capabilities in areas such as intelligence, information assurance, bioterrorism defense, missile defense and homeland security are high on shopping lists of acquiring companies. "There are definitely tiers of attractiveness," Kipps said.Companies that are not focused on particular customers or skill sets are trying to sell themselves, but are not finding many interested buyers, he said."If you are a plain vanilla engineering services company that's a mile wide and an inch deep, you're not going to get many takers," he said. "To do an acquisition, it is more important than ever for the seller to be focused."As for Perot Systems, the company intends to continue making acquisitions to beef up its government business, Bedner said. Over the next several years, he expects the government business to grow more than 20 percent a year, with half coming from internal growth and half coming from acquisitions. The government services unit will bring in more than $70 million in 2002 with customers at the Department of Defense, Immigration and Naturalization Service, intelligence agencies and law enforcement communities."Some people are saying we are going to be the newest 800-pound gorilla," Bedner said. "I like the sound of that." *Senior Editor Nick Wakeman can be reached at email@example.com.
Since acquiring Signal Corp., in September, Veridian Corp. won an intelligence contract with one of Signal's Coast Guard customers. While not a large contract, it's an example of how we see the synergies working," said David Langstaff, president and CEO of Veridian.
J. Adam Fenster
Nick Wakeman is the editor-in-chief of Washington Technology. Follow him on Twitter: @nick_wakeman.