Consolidation begins

The federal information technology services market is in the early stages of a consolidation phase as large players seek broader skill sets and small to midsize firms look for greater mass and liquidity.

That is the assessment of a number of industry executives who believe a spate of recent purchases could be the beginning of a trend. Since March transactions have included FDC Technologies Inc.'s acquisition of NYMA Inc. Vista Information Technology Inc.'s purchase of General Analytics Corp. (GAC) and BTG Inc.'s recent agreement to acquire Nations Inc. Last week Computer Data Systems Inc. (CDSI) said it inked an agreement to purchase Analytical Systems Engineering Corp. (ASEC) for $51 million.

"All the large companies are in the market for acquisitions " said William Loomis a vice president at Ferris Baker Watts Inc. a Washington D.C. brokerage. "I can't think of a company that's not out looking. We'll see more [acquisitions] in the next six months."

"We perceive that there is a wave of consolidation building up " said John C. Kezer CDSI's treasurer. CDSI's pending purchase of ASEC which provides systems engineering services to the Defense and intelligence communities could be the first of several purchases for the company. Kezer said CDSI is looking for additional acquisitions in such fields as Defense/intelligence civilian agency IT debt collection mortgage services and student-loan processing.

Among the factors driving buyers is the need to offer a wider range of services to agencies that due to budget considerations have reduced staff. "You need to have a certain critical mass to be a player in certain government agencies " Kezer said. "As government cuts back you need to offer a full spectrum of services."

CDSI offers data processing services to such agencies as the Education Department and the General Services Administration. ASEC will allow CDSI to offer systems engineering technical and program management services in a "specialized niche " Kezer said.

Another force is the difficulty and expense of hiring IT talent in a tight labor market [FCW May 26]. The ability to acquire skilled employees was a consideration in BTG's agreement to purchase Nations. "We're facing a difficult time finding capable people " said John Graham a vice president at BTG. "Here you have [in Nations] a very good company making money with relationships with customers." Nations will provide BTG with 400 employees most of whom are software engineers. Nations specializes in communications engineering and installs Single Channel Air Ground Radio Systems for the Army.

In ASEC CDSI stands to gain more than 550 employees including some with security clearances. "It's expensive to go out and hire from scratch " Kezer said.

A Good Time to Consolidate

Companies looking to buy are doing so at an auspicious time. Officials at start-up Vista said they believe certain segments within the IT services arena are ripe for consolidation. K. Dunlop Scott executive vice president and chief financial officer of Vista cited network operations in which a vendor assumes responsibility for managing a client's networks as an "unconsolidated" area.

The company's March acquisition of the principal businesses of GAC provides Vista with network operations management voice communications and other services. GAC now called GAC Technology Services Inc. is the first purchase for Vista which was launched earlier this year. The company plans to grow to a $200 million IT services business in three years through acquisitions and internal growth.

The company has equity backing from Golder Thoma Cressey Rauner Inc. a Chicago-based equity investment firm. Vista's management team is led by president James H. Duggan who helped develop a series of acquisitions that built DynCorp's IT services business.

From the sellers' perspective smaller companies are seeking larger partners to facilitate growth executives said.

In some cases small companies "just can't grow past a certain revenue wall " Loomis said. Or in the other extreme the company is swamped with business and needs to ally with a larger company that can accommodate growth.

Loomis said newly graduated 8(a) companies may find themselves in a position to seek a buyer. Indeed three of the recent acquisitions - GAC NYMA and Nations - involved former 8(a)s.

One common trigger for consolidation however does not appear to be playing a role in the IT services sector it is not a shrinking business base that compels suppliers to band together.

"Consolidation often occurs when business starts to dry up " Loomis said.

"That's not the case here."