Litronic to acquire Pulsar Data Systems

Security vendor Litronic Inc. is close to completing a deal to acquire federal systems and services provider Pulsar Data Systems Inc., which has been suffering financially because of the government's Year 2000 problems, according to documents filed with the Securities and Exchange Commission.

Litronic and Pulsar entered into the agreement on Feb. 9, and it will not close until the upcoming launch of Litronic's initial public offering. Under the agreement, Litronic president and chief executive officer Kris Shah will remain CEO, while Pulsar president William Davis will become president of the merged company that will be headquartered at Pulsar's offices in Lanham, Md., according to the IPO statement.

Pulsar, a former 8(a) company, has shifted its focus over the last two years from reselling individual products to integrating solutions.

But over the past year the company has significantly reduced its staff and expenditures as total revenues from federal customers dropped 23 percent from 1997 to 1998. Pulsar attributes the loss of business to "the government's reallocation of budget dollars from hardware and software procurements toward resolving Y2K issues," according to the IPO statement.

"Obviously Y2K has had an impact on firms, but this definitely would be the first time that I have heard of a company being affected to that extent," said Olga Grkavac, executive vice president of the Enterprise Solutions Division of the Information Technology Association of America.

Litronic, a small business based in Irvine, Calif., has been in the federal market for more than six years and has worked with various government agencies, including the National Security Agency. The company also contributed to the Treasury Department's smart card pilot and continues to support the Defense Department's Fortezza program, which secures computer hardware against electronic tampering.

While Litronic also has been losing money because federal agencies have cut their budgets, the company expects the merger to bring its budget back into the black, according to its IPO statement.

The company offers Internet-based security services and products based on public-key infrastructure, the fastest-growing segment of the IT security market, according to research firm Datamonitor. The Pulsar acquisition is the first step by Litronic to expand its reach in the federal and consumer markets.

The acquisition is intended to "capitalize on opportunities in the rapidly growing Internet security market," according to the IPO statement. When the acquisition closes, Litronic will roll out its security products to Pulsar's client base, which includes more than 100 federal agencies.

"We believe that our newly acquired Pulsar network integration solutions expertise will provide us with significant competitive advantages with respect to our Internet data security offerings, as the implementation of Internet Protocol Network security solutions and infrastructure requires specialized skills which are typically limited in corporate information technology departments," the statement said.

"Services companies and acquiring services companies all the time...that's one of the best ways to get scarce resources," Grkavac said. "With a shortage of employees, an acquisition is the easiest way to get needed skills."