Longstreet Partners, LLC.

News

Anteon Merger Sets Off Deal Talk
More Activity in Sector Predicted

By Ellen McCarthy and Renae Merle
Washington Post Staff Writers
Friday, December 16, 2005; Page D01
Read Article

In a market that's become accustomed to a steady pace of pricey deals and high-profile mergers, General Dynamics Corp.'s proposed $2.1 billion purchase of Anteon International Corp. pushed up the stock of other likely acquisition targets and touched off a new round of speculation about which firm would be sold next.

On Wednesday, when the deal was announced, stock prices of four of the Washington area's largest independent technology contractors -- CACI International Inc., SRA International Inc., ManTech International Corp. and SI International Inc. -- rose significantly. Executives of the companies have hardly hung "For Sale" signs out their windows, but investors and analysts are already betting that there are more deals to come.

"They all make an attractive acquisition," said Joseph A. Vafi, an analyst with Jefferies & Co. "This government area, nothing is like it in terms of the transaction activity and ongoing speculation about future activity."

There is no one combination that analysts see as an inevitable pairing. Just as the Anteon deal seemed to fall together quickly, recent talks between Lockheed Martin Corp. and Computer Sciences Corp. ended without an agreement.

Yet analysts say virtually any of the large technology contractors would be valuable additions to defense companies trying to diversify.

SI International's broad information-technology business and ManTech's contracts with intelligence agencies make them both attractive to larger companies, according to industry analysts. CACI International could reach $2 billion in revenue soon, making it the largest among the mid-tier players and an especially tempting merger target, they said. Even San Diego-based Science Applications International Corp., which has filed for an initial public offering, is not out of the running as a merger prospect for a defense firm, some analysts added.

Companies such as CACI and ManTech have been active acquirers themselves, and some industry experts predict it is this mid-tier set of technology contractors that will be the biggest buyers in the months ahead as they look typically for smaller firms that add expertise, employees with security clearances and existing contracts.

"Everybody pays attention to the $1 billion deal, but the activity has been much more brisk for the smaller companies," said Thomas Meagher, a government technology analyst for Friedman, Billings, Ramsey & Co.

ManTech's spokesman said the company thinks of itself "as an acquirer, not as a company to be acquired." And SI International's chief financial officer, Thomas E. Dunn, said that while his firm is "not for sale," the company's board serves its shareholders and would consider a sale if it was in their best interest.

"Most companies in the market today either think of themselves as potential buyers or potential sellers or both," said Stan Z. Soloway, president of the Professional Services Council, an industry organization. "And all of them are having that internal strategic discussion constantly." Since 2002, 280 government-technology firms have been snapped up in acquisitions, 39 in the Washington area just this year.

The dealmaking is not limited to publicly traded companies.

Shiv Krishnan, chief executive of Indus Corp., a Vienna firm that provides software engineering and data-mining services to federal agencies, said rarely a day goes by without a call from a larger contractor or private equity firm interested in buying his company.

Krishnan says he is not interested in selling -- yet.

"But if somebody puts a huge offer on the table . . . I'm going to have to really look at it and say, 'How much harder am I going to have to work to equal that?' " Krishnan said. "There are times when you feel, 'Hey the market is so hot, should I sell?' It is a dilemma."

It's a dilemma facing contracting executives all around the Beltway, said Mark Moore, partner at Longstreet Partners LLC, a boutique investment banking firm that works with government contractors. Executives are often torn between taking advantage of the generous offers put before them, he said, and the desire to maintain control of their companies and take care of their employees.

"It's never easy for them -- their whole professional lives a lot of times have been put into the companies they're running," Moore said.

But the deals are often valuable enough to quickly make multimillionaires out of the companies' executives, and the prices have risen as new sources of capital entered the market. British companies have recently shown great interest in buying U.S. contractors, as have private equity firms and "blank check" companies that combine smaller firms into a holding company.

Michael H. Lustbader is a principal at Arlington Capital Partners, a private investment firm in the District that has bought several government information-technology and defense companies in recent years and in 2004 combined two of its smaller investments into Apogen Technologies Inc. of McLean.

Through acquisitions and internal growth, Apogen tripled its sales and operating profit and became a top 10 contractor for the Department of Homeland Security. Lustbader said that Arlington Capital's plan was to hold on to Apogen and sell it at a big profit a few years from now but that this summer too many suitors came calling.

We were getting multiple expressions of interest, feelers from all kinds of larger companies out there," he said. "Our plan was to hold on to the company, but it really came down to the high, very high, level of interest we received."

In September, Apogen was sold to British defense firm QinetiQ for about $300 million.