Tracor to buy Cordant

Tracor Inc. a $1 billion defense electronics company last week said it will buy Cordant Inc. for $65 million and make the Reston Va. systems integrator a cornerstone of its push to become a major player in the federal information technology market.

Cordant rumored for several months to be seeking a buyer will be operated as a wholly owned subsidiary of Austin Texas-based Tracor. Cordant president Peter P. Kusek and other key executives will retain their positions.

The deal which is expected to close by Sept. 30 could be worth an additional $15 million depending on Cordant's 1996 performance and the potential award of a large contract company officials said. The parties declined to specify the outstanding contract.

Cordant will operate as part of Tracor Information Systems Co. a newly formed business unit of Tracor. Joining Cordant in Tracor Information Systems will be Quality Systems Inc. and Software Center for Excellence both units of Tracor's Vitro Corp. subsidiary. Tracor acquired Vitro which specializes in software engineering and professional services in 1993.

Tracor Information Systems - which will begin with combined revenue of more than $200 million - will spearhead Tracor's campaign for IT business in defense and civilian agencies where it will compete with the likes of BTG Inc. Computer Sciences Corp. and Electronic Data Systems Corp. said Vitro president Barry G. Campbell who will be president of the new division.

With IT becoming a growing factor throughout its business Tracor sees the Cordant acquisition as a way to capitalize on this market. The availability of Cordant - which has a backlog of IT work in defense and civilian markets - "really fell into place with a corporate strategy we are evolving to focus more of our resources in the IT arena " Campbell said.

Even with its focus on sophisticated electronics in the defense and intelligence communities Tracor still earns about $75 million to $90 million annually from more traditional IT Campbell said. "With the recent demise of the Brooks Act and the changing environment in the IT arena it certainly made that marketplace a lot more attractive to us " he said.

Cordant which has about 150 employees had revenues of about $120 million in 1995 and said it expects to exceed $150 million in 1996. The company's portfolio includes extensive work designing computer systems for the U.S. Postal Service and providing product and systems integration in the Defense Department.

Over the last year Cordant has picked up several potentially lucrative contracts in its core businesses.The company is one of three vendors awarded contracts under Integration for Command Control Communications Computers and Intelligence (IC4I) a $929 million product and integration services program. Cordant also picked up a $108 million contract for desktop and laptop computers under the Navy's New Technology for Office and Portable Systems (NTOPS) program. And the integrator added to its civilian portfolio when it became one of four vendors selected to develop kiosk systems for USPS and one of 20 prime contractors selected recently for the government-wide Chief Information Officer Solutions and Partners program which is run by the National Institutes of Health.

Despite its recent successes Cordant's growth has been somewhat inhibited by its relatively small size particularly as its competitors have been growing larger and stronger through consolidation Cordant's Kusek said.

"We are too big of a company to protect a couple of niche areas [but] to grow bigger means competing with the likes of EDS and CSC " Kusek said. "We felt we needed to align ourselves with a company that was committed to our industry and [to building] a dominant business in our industry."

In particular Tracor's Vitro subsidiary provides much-needed and complementary engineering capabilities Kusek said. For example Vitro's Software Center for Excellence unit recently was evaluated as a Level 3 software development organization according to the Software Engineering Institute's Capability Maturity Model. A Level 3 rating is a requirement on many large DOD software development programs.Vitro's professional services work "will just make us a stronger competitor " Kusek said. "It will give us the opportunity to pursue some things we just otherwise wouldn't be able to do."

Besides opening up new markets for Cordant the acquisition also will pay off on existing programs by broadening the potential customer base Campbell said. On IC4I NTOPS and Cordant's Computer-Aided Design-2 contract with the Navy "we have a whole set of customers they haven't even thought of dealing with " Campbell said.

The acquisition should help Cordant by adding financial resources several industry sources said. "It gives them a lot more financial leverage" to become more aggressive on pricing said one vendor. "The bigger you are the more deals you are able to make."

However the impact may be mitigated somewhat by the price Tracor paid said another source. At $65 million - before the $15 million contingency - the price represents more than half of Cordant's 1995 revenue the source pointed out. "If you pay that kind of money for a company you better turn a profit - and if you better turn a profit you cannot bid as aggressively " the source said.

Still the acquisition price reflects industry confidence in the health of the federal IT market said another vendor that has been involved in a merger. As such the $65 million price tag is based upon anticipated growth in the market more than Cordant's current value the vendor said.