Wednesday, July 09, 2003

Government IT: Who's Ready For A Deal?

Over the past year, consolidation among companies providing technology services to the federal government has been brisk, to put it mildly. "Unprecedented," says David Heinemann, head of the Strategic Advisory Services Group at Input, a Reston, Va.-based market research firm.

In the first quarter of this year, Input tallied 18 merger or acquisition transactions among tech outfits selling expertise to the federal government. And the deals just keep coming. In late May, Fairfax, Va.-based Anteon International completed its $91 million purchase of Information Spectrum, a provider of identification card technology. Shortly thereafter, General Dynamics offered to buy Veridian, a network security engineering firm headquartered in Arlington, Va., for $1.5 billion.

All this deal-making is driven by the $45 billion that Uncle Sam spends each year on vendor-furnished information systems and services, a number expected to grow 8.5% annually over the coming five fiscal years. Input projects that by 2008, 87% of federal technology spending will get contracted out.

Both the growth prospects for the business and the consolidation frenzy have attracted investors. Anteon, for instance, trades just a hair off its 52-week high. In fact, some of these stocks have done so well, that some market watchers are nervous. For example, last month The Washington Post columnist Steven Pearlstein warned of a "Beltway Bubble About To Burst."

Time to sell? Anteon Chief Executive Joseph Kampf, for his part, doesn't sound alarmed. "There's more consolidation to be had," he says, pointing out that there are 3,000 companies in this marketplace, and even the largest players in the field hold market share numbers in the single digits.

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