Under one umbrella

Three affiliated companies merged Oct. 25 to form a new entity specializing in IT services and solutions for the federal market.

Centurum Inc. of Arlington, Va., brings together Techplan Corp., TDS Inc. and Klein & Stump Inc.

Techplan provided systems integration and management solutions to clients in the federal and commercial sectors. TDS supplied a broad range of IT support work for the Defense Department, primarily installing and maintaining IT systems on Navy warships. Klein & Stump specialized in information operations and knowledge management and cryptology services for classified U.S. government customers.

As Centurum, the combined companies will offer a range of IT and related communications, command and control functions, including network engineering services, systems integration, business process management, systems engineering and design, information operations and analysis and operational support. The company is focused exclusively on the federal marketplace.

"Our feeling was, at this time in the market, we wanted to bring together the organizations under a central banner in order to provide a greater degree of service offerings to our clients ? but also to raise the profile of the company," said Robert Matteucci, Centrum's chairman and chief executive officer. He was chief executive of TDS and Techplan. Jerry Stump, a Klein & Stump cofounder, is Centurum's president.

This kind of consolidation among small IT companies is unusual in the federal marketplace, federal market merger and acquisition specialists said.

Much of the marketplace's consolidation activities occur with companies that have revenue in the $30 million to $100 million range, said Jerry Grossman, a managing director of the Washington office of Houlihan Lokey Howard & Zukin, a McLean, Va., investment bank. Centurum probably was able to pull the three firms together because they all have common owners, he said.

Matteucci founded Techplan in 1969 and was its chief executive. He set up TDS in 1974 and was its chief executive. Techplan acquired Klein & Stump in 1993.

In 2003, the three companies had aggregate revenue of around $52 million with 9 percent to 10 percent in profit, Matteucci said. He said he expects the combined entity to post 2004 revenue in the low $60 million range with a 9 percent to 10 percent profit. Centurum wants to double its revenue within two years.

Companies that have $30 million to $60 million in revenue from prime contracts number about 450 in the federal marketplace, although the total increases when you add in those that have a mix of prime and subcontracts, Houlihan and Lokey's Grossman said. But as standalone organizations, the three companies that comprise Centurum had to compete with nearly 3,000 companies in the $10 million to $20 million range.

Matteucci wants Centurum to grow internally and by acquiring niche IT firms with annual revenue of $10 million to $20 million. The privately owned company has a secured, and as of yet unused, seven-figure revolving credit facility from a financial institution, he said. Centurum also may mull going public in the long-term, he said.

Such an acquisition strategy for a small company in the federal marketplace would be difficult to accomplish, merger and acquisition experts said.

"It could be a helpful strategy, but it's hard to accomplish for all the risks and reasons," such as obtaining credit, identifying companies Centurum wants and finding firms that are willing to be sold, Grossman said.

Even with the company's $50 million in revenue and a revolving line of credit, its capacity to buy other companies is unlikely to support purchases of more than $12 million to $15 million, he said.

Also, small companies make difficult acquisitions because they have distinct cultures largely based on their owners, and are just as expensive to buy as larger firms in terms of fees, said J. Richard Knop, chairman and co-chief executive of Windsor Group LLC, an investment banking firm in Reston, Va. Such companies also often lack infrastructure, he said.

Companies with revenue under $25 million also have limited opportunities to bid on federal contracts, because many bundled awards are out of their reach, he said.

But small companies with a high-end skill set and domain knowledge of specific agencies have somewhat of a leg up, Knop said.

For now, Centurum is focused on establishing "a recognizable brand upon which we intend to build," Matteucci said.

Matteucci said that Centurum would go after multiyear contracts in the $100 million range, but declined to name specific procurements it intends to pursue.

The three companies together are prime contractors on about 60 percent of their work now, but Matteucci wants to increase the number to about 80 percent.

As a small IT company in the federal marketplace, Centurum wants to distance itself from smaller players that have annual revenue of $30 million or less, said Samuel Seymour, a company senior vice president.

Centurum plans to go head to head with large concerns, including Lockheed Martin Corp. and Northrop Grumman Corp., as well as midsize companies, such as CACI International Inc. and Anteon International Corp.

Centurum's partners include BearingPoint Inc., Computer Sciences Corp., EDS Corp., General Dynamics Corp., Lockheed Martin, Raytheon Co., Science Applications International Corp. and Titan Corp.

Despite the consolidation of companies in the federal IT market, Centurum as a small company will be able to offer its customers the flexibility and responsiveness that larger firms cannot, Matteucci said.

Centurum, with nearly 500 employees, has offices in Charleston, S.C., Marlton, N.J., Norfolk, Va., San Diego and Tampa, Fla. Approximately 80 percent of the company's employees have Defense Department security clearances.

Centurum's federal clients include the House of Representatives, Navy and Justice and State departments. It plans to pursue new business from the Commerce, Energy and Homeland Security departments and the FBI.

"We see a strong capability to bring current Defense Department-cleared individuals and capability" to law enforcement and first responders as they pertain to IT, Seymour said. "There's a big need for that right now. The human capital in the government is really stretched to the limit." n

Staff Writer Roseanne Gerin can be reached at rgerin@postnewsweektech.com.