Fed Data building on acquisition spree
- By Margret Johnston
- May 03, 1998
Few companies in the federal information technology market beat Federal Data Corp. at the acquisition game.
In a little more than a year, the Bethesda, Md.-based systems integrator quietly has acquired five companies and a division of a sixth, growing to 2,000 employees and annual revenue between $450 million and $500 million.
Considering its 1995 revenue of $150 million and employees numbering 200, the growth has been considerable, but Federal Data wants to continue pushing for the major leagues.
The growth has been driven by changes in the federal procurement process, which has given agencies much more power to select the vendors they want, with past performance weighing heavily.
"For a company our size, it's very awkward. We need to be [at] about a billion [dollars in annual revenue], and we're not there yet," said Dan Young, chief executive officer of Federal Data. "Our view of the market is you have to have mass to compete...because the customer is going to be able to select whomever he wants."
The acquisitions broaden Federal Data's portfolio beyond systems integration and add more capabilities to serve the customer base it has established at NASA, the National Institutes of Health and the Federal Aviation Administration. The company is organizing its assets into four divisions (see sidebar below).
Federal Data has sought out information services companies as opposed to product companies in an effort to broaden its base, said Rick Knop, a partner in the investment banking firm Boles, Knop and Co. LLC. Knop noted that Federal Data took some risk in acquiring 8(a) companies because not all of their contracts transferred.
Federal Data's shopping began with NYMA Inc., Greenbelt, Md., a former 8(a) company with estimated revenue of $100 million in 1995. NYMA performed much of its engineering services work for NASA and the FAA.
Federal Data followed that buy in June with the purchase of Sylvest Management Systems Corp., a Lanham, Md.-based integrator specializing in networking and open systems and with a large customer base at NASA.
Sylvest's reseller relationships— including ties to Hewlett-Packard Co. and Compaq Computer Corp.— made the company attractive. Sylvest also brought sizable contract awards to the table, including NASA's Scientific and Engineering Workstation Procurement II and the Treasury Department's Treasury Distributed Processing Infrastructure program for Unix workstations and servers, which could be worth more than $300 million.
"The growth is very focused and very strategic," said Rene LaVigne, vice president of sales and marketing in Federal Data's System and Technology Group and formerly a vice president of Sylvest. "There is strategic intent within the four business units." Sylvest is now a wholly owned subsidiary of Federal Data and is gradually making the transition, which will include a name change, LaVigne said.
Within the past five months Federal Data has made four other buys: a service division of Telos Corp.; Tisoft Inc.; ROW Sciences Inc., Rockville, Md.; and Technical and Management Assistance Inc. (TMA), Atlantic City, N.J.
The Telos division provides software engineering service and support to NASA's Jet Propulsion Laboratory in Southern California and to other NASA and government clients. The division also wrote the software for the Sojourner Rover, a robot that surveyed the surface of Mars last summer.
TMA provides support to the FAA's air traffic control system at its Technical Center in Atlantic City, and ROW Sciences specializes in health care projects. Tisoft develops office automation and networking solutions and has a strong customer base at the Justice Department.
Young also said he would like to use Federal Data's new resources to "return to [the Defense Department] in a fairly substantial way." A decade ago about 80 percent of Federal Data's business was with DOD. Now it's about 20 percent, Young said.
One potential inroad is the upcoming General Services Administration Seat Management program, which will allow agencies to outsource management of their desktop computer environments.
"If seat management is embraced by DOD, it will be a marvelous vehicle," Young said. If all bidders win, Federal Data would be content, he said, because the company finds such contracts "a happy hunting ground. We have focused our resources on staying close to the customer."
Knop said the objective is to take Federal Data public, following the same strategy that the Carlyle Group, a Washington, D.C., merchant banker that invested in Federal Data in 1995, used with systems integrator BDM International Inc. "They are focused on getting beyond $500 million [in revenue], and they are almost there. They probably are not too far away from an initial public offering," said Knop, whose firm has completed 14 mergers in the federal IT market in the past four years.
Three years ago, when the executives at Federal Data worked out a game plan for their company, the strategy they came up with was only partly right, Young said. They predicted that the federal market was going to change drastically, but they did not expect it to happen as rapidly as it did.
Young and the company's other executives, including Harry Marren and Paul Taltavull, predicted the procurement process would be expedited, contracts would be shorter— no more than three years in most cases— and the nature of sales would change from what Young called an "intellectual process" to a "relational process."
In a market where sales are based on "the relational process," customers will build loyalty with the companies that have the greatest integrity, capability and past performance, Young said.
"We projected all this in '95 to occur by the end of the decade," Young said. "It happened within a matter of two years."
Young said the company figured things had to change for several reasons: The protest process was out of control, customers were complaining "mightily" about delays in getting new technology, and Congress, dominated by the Republican Party in 1994, was getting into the game.
And the attitude that the customer can select whomever he wants is "permeating every part of government, even to the contract shop level," Young said. The contract shops are using the new power to select vendors who have performed well in the past. That was not the case before reform, Young said.
In 1995 Bill Conway, managing director of the Carlyle Group— and "one of the real powerhouses" in the federal IT market, according to Young— came calling, and the two realized they had reached similar conclusions about the future of the federal market.
By December 1995 Carlyle invested $58.8 million in Federal Data and now owns about 85 percent of its shares; the remainder is owned by management.
Young would not say whether Federal Data has any other acquisition targets, but he said there were three companies that Federal Data looked at but did not buy. "We have learned a lot from Carlyle, including that the worst mistake you can make in an acquisition is to pay too much money. It creates all sorts of problems down the line."
Federal Data does not predict any more big changes in the market soon, and the company just wants to focus on assimilating its acquisitions and on satisfying its customers, Young said.
Pointing to the wooden hawk carving that has been on his desk for as long as he can remember, he said, "It's focused. That's what I like about it: It reminds us to focus like a hawk."
Federal Data's Corp.'s Four Business Units
* Systems Integration Group: Core of Federal Data; includes Tisoft Inc.
* Science Engineering Group: Focused on health sciences, transportation and space contracts; includes NYMA Inc., Technical and Management Assistance Inc., ROW Sciences Inc. and a division of Telos Corp.
* Systems and Technology Group: Focused on product-based sales; includes Sylvest Management Systems Corp.
* Solutions Group: Focused on training and consulting; includes a Microsoft Authorized Training and Education Center.