The British are coming

British defense giant QinetiQ's recent announcement that it will acquire McLean, Va.-based Apogen Technologies is only the latest sign of overseas companies' continuing desire to enter the lucrative federal information technology market.

Pending U.S. federal regulators' approval, QinetiQ, a $2 billion defense and security company spun off from the U.K. Ministry of Defence in 2001, will buy Apogen for about $300 million in cash. Apogen, which had about $205 million in revenues last year, will become a wholly owned subsidiary of QinetiQ North America and will retain its name, management staff and all of its 900 employees.

Top executives from both companies said the move will better position Apogen within the defense and homeland security market to compete for larger federal government opportunities and introduce agencies to state-of-the-art technologies.

"Things we might not have looked at as a potential prime contractor in the past because we weren't big enough or because we didn't have the breadth and depth of technology as a $2 billion company does, we're going to take a second look at," said Todd Stottlemyer, Apogen's chief executive officer.

David Anderson, CEO of QinetiQ North America, said the company has been looking to enter the market since 2003, when the U.K. government brought in the Carlyle Group as an investor. For the past two years, QinetiQ has been looking at midsize but ambitious U.S. companies with a strong technological and management base that the British company could help increase.

Last fall, QinetiQ acquired St. Louis-based Westar Aerospace and Defense Group and Foster-Miller, an engineering and technology development company based in suburban Boston. Now Foster-Miller, as a QinetiQ subsidiary, is acquiring Reston, Va.-based Planning Systems, a high-tech company that provides systems engineering work to the federal government.

"We believe they can grow quite a lot from where they are at the moment, and we want to encourage them to do that," Anderson said, referring to all of the American companies.

Alan Balutis, president and CEO of Input's Government Strategies unit, said many companies are looking to enter the federal IT market on their own or through acquisition because the federal IT space is growing and lucrative.

For example, he said, Canadian outsourcing firm CGI acquired American Management Systems, and Britain's BAE Systems purchased DigitalNet. "It's an international economy these days," he said.

The same dynamics occurred when Nortel Networks, a Canadian business, acquired PEC Solutions. Forming the Nortel PEC subsidiary gave Nortel a U.S.-based company to work from in developing U.S. government business and gave PEC the greater size it needed to compete for larger opportunities.

In the 15 years that Input has been tracking the federal market, it has grown every single year except for one, Balutis said. Even this year, when IT spending by most agencies — apart from the Defense and Homeland Security departments — has been flat, the federal market has increased 7.1 percent overall. It will grow to more than $90 billion in the next four years, he added.

The government deserves its reputation as the "Fortune One company," meaning that as a market, it is the most potent potential buyer of products and services, Balutis said. "Who better to do business with than a Fortune One company?" Balutis asked. "And they've got a pretty good track record of paying the bills, too."

He said that foreign-owned companies are interested in agencies across the entire federal spectrum, not just the defense and homeland security market. Those are "a little more restricted because of government rules and regulations about what nations can own and participate in what kinds of things," Balutis said.

However, he said QinetiQ is a solid and reputable company, and Apogen appears to be a good acquisition.

Stottlemyer said QinetiQ has developed state-of-the-art geospatial, sensor, laser and detection technologies that could benefit federal agencies.

The company has developed a Global Positioning System-based container-tracking system that uses radio frequency identification technology and could enhance DHS' initiative to monitor cargo shipments bound for the United States, he said.

Anderson said Great Britain has been dealing with security issues longer than the United States has. "The U.K. has been facing — not just recently but for the last 30 years — essentially an internal terrorist problem," he said. "And that has encouraged us to look for technological solutions to those problems at a time when the U.S. didn't face those kinds of issues. So, we've got many, many years of experience of dealing with this kind of thing."

In the next few years, Anderson said, QinetiQ's strategy will be to focus on the U.S. market, strengthen the acquired companies and look for new firms to bring into the fold. Potential acquisitions might be firms in the same markets as those QinetiQ has already acquired, or they could be in different arenas, Anderson said. The long-term intention is to develop a global defense and technology business, he added.

QinetiQ has royal blood

Before becoming a commercial venture, QinetiQ, a British defense and security company, was part of the Defence Evaluation and Research Agency, a research organization that provided testing and research and development for the U.K. Ministry of Defence. On July 2, 2001, the British government split the agency into QinetiQ and the Defence Science and Technology Laboratory, which is still part of the British government.

QinetiQ now develops a wide range of technologies across various defense and security sectors, including surveillance and security systems, radar sensors, nanotechnology, simulations and unmanned aerial vehicles.

In December 2002, the Defence Ministry, which retained majority ownership in QinetiQ, brought in the Carlyle Group, a Washington, D.C.-based private equity firm. Carlyle took a minority stake in the company. QinetiQ, which posted about $1.5 billion in revenue for the fiscal year ending March 31, has about 12,000 employees in the United Kingdom and the United States.

— Dibya Sarkar

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