Integrators shop for acquisitions

Former executives of CACI Inc. and Computer Sciences Corp. have formed a company that aims to reach critical mass in the federal information technology services market by buying and consolidating small contractors.

SI International Inc., based in Gaithersburg, Md., will be headed by chairman and chief executive officer Ray J. Oleson and president and chief operating officer Walter J. Culver. Oleson is the former chief operating officer of CACI, and Culver is a former division president at CSC. Another top executive is Thomas E. Lloyd, formerly an acquisitions executive with CACI.

SI International will seek to buy companies that have revenues ranging from $10 million to $65 million and that are focused on providing consulting, application development or training to federal customers, Oleson said. "Smaller companies often fit those niches," Oleson said.

SI International, which is backed by the Chicago-based investment banking firm Frontenac Co., has not yet announced its first purchase but expects to have the deal signed by Dec. 31. At least two other small companies are in serious talks with SI International, Oleson said.

The company's goal is to reach $300 million in revenue in three to four years and possibly go public.

The venture is Frontenac's first in the federal market, but the firm has nearly three decades of experience making private equity investments in the health care, consumer and industrial segments as well as others. Since 1971, Frontenac has invested about $750 million in more than 130 companies. It has raised a $300 million equity capital fund to back SI International and other ventures.

Oleson said SI International would seek to bring together companies with solid reputations, as did major and medium-size contractors during the merger-and-acquisition trend that swept through industry during the past several years.

"One theory behind this is there's been a large consolidation at the top level and the middle level, but at the smaller level there hasn't been a real large consolidation," Oleson said.

Dan Young, chief executive officer of Federal Data Corp., said SI International's strategy is sound, provided the company has sufficient equity capital and access to debt financing from Wall Street. "That's really the name of the game that anyone following that strategy must pursue because he has no other currency," Young said.

Young, whose company bought six firms in the past couple years, also cautioned that the market is currently "very frothy," meaning prices are high, and there has been a virtual closure of the high-yield bond market since last August.

SI International's strategy also is called a rollup, and it is one that Joseph M. Kampf, president and CEO of Anteon Corp., does not like. Acquiring companies is the easy part compared with the task of molding them into a cohesive unit, said Kampf, whose company made two acquisitions in the past year and continues to shop.

There are a lot of good, small companies providing service in the federal market, Kampf said, but in nearly every case their value is based on one slice of technology, one customer, one contract vehicle, or else they have a dynamic leader who is likely to leave if the company is acquired.

"For us, it's too much effort for not as much gain as we can get out of buying a bigger company," Kampf said.

Anteon is "pretty particular" when it goes shopping, Kampf said. It acquired only two companies— Vector Data Systems Inc., Alexandria, Va., and Techmatics Inc., Fairfax, Va.— out of 65 it considered in the past year.

Kampf is looking at eight prospects, including six with revenue of more than $100 million and two that are small enough to be in SI International's range. But Kampf said Anteon "doesn't have any desire to be big for the sake of being big." Companies that do not fit with Anteon technologically and culturally or that do not have the right customer set or stable finances are quickly dropped from the list.

Anteon, which projects revenue of $250 million for 1998, up from $176 million last year, has worked for two years on an information system for the Federal Emergency Management Agency that was used for the first time during the Texas flood earlier this year.

Anteon has applied similar technology to a cargo movement system for the Air Force, and it hopes its acquisition of Vector, which maintains the intelligence backbone for NATO, will lead to increased business in Europe, including in the countries that have been approved to become new NATO members.

That promises to be fertile ground for Anteon, but its negotiation team will be at least as busy as SI International's as both shop for prize acquisitions.