TRW, BDM seek fed biz after merger

TRW Inc. late last month announced it would acquire BDM International Inc. for about $1 billion an acquisition that both companies described as necessary if they are to succeed in the federal information technology services market. Each systems integrator does a large amount of business in the federal market but in significantly different areas.

While TRW focuses on research and development and test and evaluation projects particularly in the space and Defense arenas BDM delivers more traditional systems development and engineering services for Defense and civilian agencies.

According to both companies the growing complexity of federal IT projects - particularly on large governmentwide acquisition contracts (GWACs) - require a breadth of services that neither company could provide on its own.

Strategic Move The merger "represents a very important strategic move for TRW in that it provides a significant platform for substantial growth in the rapidly growing IT markets " particularly given the "sometimes explosive growth rates" in the federal and state and local markets said Joseph T. Gorman chairman and chief executive officer of TRW.

BDM with its $1 billion of federal IT business in 1996 "complements our existing systems integration business and clearly stretches [it] across many markets and customer bases " Gorman said. TRW meanwhile gives BDM some much-needed bulk in terms of financial and technical resources said Philip A. Odeen the president and CEO of BDM. "Having greater size and broader range of capabilities...is a very important part of being successful [in the future] " Odeen said.

In particular with the government relying more on large task-order GWACs and blanket purchase agreements "the marketing and sales costs are higher and you have to have more robust capabilities in the market " which means "more money [and] more people " he said. Gorman said TRW expected the combination of resources to make it possible for the merged company to grow at a faster rate than either company could do alone which more than justifies the $1 billion price tag.

TRW said it did not expect to lay off any employees in part because of the expected new business and in part because of the lack of overlapping skill sets. As a matter of fact Gorman said "One of the reasons we like BDM so much is because of the 9 000 people that come along." Additionally BDM's senior management team has agreed to stay on after the merger he said. Consolidation Trend Industry observers said the dynamics of the TRW-BDM merger are not unlike others that have taken place in the past several years.

Those include Raytheon Corp.'s acquisition this year of Hughes Aircraft Co. and Northrop Grumman Corp.'s purchase of Logicon Inc. and last year Lockheed Martin Corp. bought Loral Corp. and Tracor Inc. acquired Cordant Inc. The Information Technology Association of America (ITAA) "has felt for some time that there would be increasing mergers and acquisitions in the federal and commercial [markets] " said Olga Grkavac senior vice president of ITAA's Systems Integration Division. The government "is looking for complete services " which is reflected in its reliance on GWACs and similar vehicles.

A lot of the pressures are "people-driven " particularly in the Washington D.C. area where there is a shortage of technical talent Grkavac said. Companies see mergers and acquisitions as one of the primary means of filling their backlog of job openings she said. Ed Hogan vice president of market development and planning at systems integrator Electronic Data Systems Corp. said the present slew of acquisitions "just continues to lower the number of large players in the market."

That trend is likely to continue given that "every single small company around the Beltway is for sale " Hogan said. However in this particular case the acquisition does not really change the competitive landscape in a specific field because TRW and BDM with little overlapping business are not competitors.

"It sounds like a great combination " said an executive at another systems integration firm. While BDM is picking up some much-needed resources TRW will benefit from BDM's expertise in various areas of the federal government and "in today's world that `domain knowledge' is king " the source said. However the merger also has its potential dangers.

In particular TRW's portfolio of systems engineering and technical assistance contracts and similar projects often carries exclusion clauses that prevent them from competing for related business. For example the company is the primary systems engineering and technical assistance contractor at the Federal Aviation Administration which has required it to pass up some other lucrative opportunities in the agency's modernization program.

That same issue was a problem for BDM several years ago when it was owned for a while by Ford Aerospace according to the source. While TRW and BDM appear to have a lot of synergy "There might be too much synergy for a lot of people " the source said.

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