market

Associates say Kent Kresa, chairman of the board at Northrop Grumman Corp., describes his organization as a company of immigrants.

It's no wonder. Northrop Grumman is a union of myriad companies that have brought thousands of people into its fold. In the information technology sector, Northrop Grumman has acquired half a dozen companies since 2000.

"So many of the 120,000 [employees] come from different legacy organizations," said Jon Korin, executive director of strategic development at Northrop Grumman Information Technology.

Korin, who joined Northrop Grumman via its acquisition of Litton Industries Inc., said company personnel commonly inquire about one another's corporate origins. Northrop Grumman's most recent and largest IT-related acquisition, of TRW Inc., closed late last year and should solidify the company's hold on the No. 1 slot in Federal Computer Week's annual ranking of federal systems integrators.

Northrop Grumman's purchasing pattern is representative of a broader mergers and acquisitions wave that some observers say is growing. Through early August 2003, Federal Sources Inc. (FSI) had logged 78 transactions in the public-

sector IT market. The total number of transactions for 2002 was 67.

Recent acquisitions fall into a couple of categories. Some buyers are pursuing companies with intelligence agency customers and personnel with coveted security clearances. Other suitors are in the market to expand their reach in IT. That's particularly the case for defense contractors hoping to emulate the federal IT presence of Northrop Grumman and Lockheed Martin Corp., ranked fifth on this year's list (see box, below).

But buying a company isn't the end of the story; the acquiring firm must also reorganize to incorporate the new purchase. One approach is to operate the acquired firm as an independent subsidiary.

Other buyers opt to absorb the new company under the corporate umbrella, going to market under a single brand. Others may take a phased approach, operating an acquired company as a subsidiary for a time and integrating later.

Whatever the method, the integrator-as-corporate-melting-pot trend appears to be here to stay.

Attracted to Intelligence

The desire to grow has been a traditional driver behind federal-sector acquisitions. But recent deals point to other factors. James Kane, chief executive officer of FSI, cited the desire to break into new markets as one of the current motivators. And the focus of many integrators is on the intelligence market.

The larger players seek to "strengthen as integrators in the intelligence sector," said Mark Heilman, executive vice president of corporate development at Anteon Corp. He said integrators anticipate growth in the intelligence sector as the nation pursues "a more coordinated intelligence community" since the terrorist attacks of Sept. 11, 2001.

General Dynamics Corp.'s $1.5 billion acquisition of Veridian Corp. certainly fits that profile. Veridian concentrates on national security programs for the defense and intelligence communities. The company's services include intelligence, surveillance, reconnaissance, network security and enterprise protection.

General Dynamics, ranked 18th on FCW's list, closed the Veridian deal last month. Veridian had completed its own intelligence-oriented acquisition by purchasing Signal Corp. last year.

Fifth-ranked Lockheed Martin, meanwhile, scooped up an intelligence specialty firm in June, with completion of the purchase of Orincon Corp. International. Like Veridian, Orincon is a player in the intelligence field and counts many of those agencies among its customers.

Quest for Clearances, Special Skills

Employees with security clearances are a much sought-after resource. The task of clearing an employee can take months. Accordingly, a company with a roster of cleared employees makes an attractive acquisition candidate. More than 75 percent of Veridian's employees hold national security clearances.

"You'll see the big guys looking for smaller firms that have a lot of cleared people," said Linda Allan, executive vice president of strategic programs at NCI Information Systems Inc. "You'll see them looking for small niche players with people cleared at [top secret] and above levels."

Today's buyers also are on the lookout for specialized technical capabilities, Kane said. Integrators are pursuing "smaller and privately held companies playing in niche areas." He cites CACI International Inc. as a firm that has made niche purchases to supplement its technical skills.

Fourteenth-ranked Anteon's May acquisition of Information Spectrum Inc. was, in part, a move to gain specific technical expertise. Information Spectrum specializes in smart card technologies. The company's access management projects include the Homeland Security Department's permanent resident card and the State Department's border crossing card.

Smart card expertise wasn't the only consideration, however. "The one part that's the least talked about, but in no way insignificant, is the company's presence with the Naval Air Systems Command," Heilman said. Anteon has a presence with the Navy's surface and undersea aspects, but lacked a solid base at Navair.

Donna Morea, executive vice president of American Management Systems Inc.'s public-sector practice, said the ideal acquisition is one that satisfies more than one criterion. AMS looks for candidates that are compatible with the company's core markets and services. In addition to compatibility, AMS seeks companies "that bring us customer contracts and intellectual property that we can