Wednesday, January 15, 2003

Can AMS Stay In The Big Leagues?

As the 1960s wound down, five young turks at the U.S. Department of Defense saw there was money to be made in advising governments on information technology. The firm they founded in 1970, American Management Systems, cleared a path for the multitude of technology services companies that now line the Dulles Toll Road in northern Virginia.

Yet now, AMS ranks only 77th among the top contractors to the federal government, according to Government Executive magazine. And even that spot may be in jeopardy as the company faces ever more intense competition.

Technology outsourcing from the federal government could grow at an annualized clip of 18% to $15 billion by 2007, says Input, a market research firm based in Chantilly, Va. So tech service firms that once concentrated on the now hurting commercial market are gearing up to capture business in what looks like the greener pastures of the public sector.

No surprise, consolidation has emerged as these big firms maneuver for position. Last month, El Segundo, Calif.-based Computer Sciences agreed to pay $950 million for Reston, Va.-based Dyncorp, a tech services firm specializing in government work that has sales of $2.3 billion.

Could such a deal be ahead for AMS? With latest 12-month sales of just over $1 billion and an enterprise value (market capitalization plus net debt) of $430 million, the firm could make a tempting target. Its enterprise multiple, calculated by dividing enterprise value by operating income (here defined as earnings before interest, taxes, depreciation and amortization), stands at just 3.5, low relative to a multiple of 10 for BearingPoint and 4.5 for Electronic Data Systems.

Moreover, during the past year Chief Executive Alfred Mockett has slimmed down AMS' operations to focus on its core public sector, financial services and communications markets. The firm, for example, just unloaded its utilities consulting practice for $24 million to India's Wipro, a technology services firm.

Yet Mockett, who recognizes the pressure to consolidate, sure doesn't sound like someone shopping his company around. "There will be a series of players that will go for scale and diversity and play in the big leagues," he acknowledges. But, he adds, "given the breadth of our customer base and offerings, AMS has what it takes to play on the scale and diversity side."

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