General Dynamics to Mantech Buy Small Firms to Tap Deals
Ed Silva has grown accustomed to saying no after his health-care technology company began getting queries from possible buyers about once a week last year.
The interest in IDL Solutions Inc. of Germantown, Wisconsin, came after it won one of 16 seats on a federal contract valued at $4 billion over 10 years, said Silva, 47, the company’s senior vice president.
Slots on such multi-award contracts have become coveted prizes in government contracting, as the U.S. pours more funding into them even as it plans reductions in total awards. Companies losing out on the deals are increasingly deploying an alternative strategy to get aboard: They’re purchasing others already selected for the contracts.
“You need to buy so you’re not shut out for five, or in some cases seven or in some cases even 10 years,” said Jean Stack, a McLean, Virginia-based managing director at investment bank Houlihan Lokey.
In the past two years, top contractors including General Dynamics (GD) Corp., Computer Sciences Corp. (CSC) and Mantech International Corp. (MANT) have made acquisitions to gain or increase eligibility for awards. In one case, General Dynamics acquired a company that had itself bought someone else on a contract.
Government spending on multiple-award contracts, or MACs, increased 49 percent to $121 billion in fiscal 2010 from $81 billion in fiscal 2006, according to a Bloomberg Government study. Total contract spending increased at about half that rate to $534 billion from $429 billion during the same period, according to data compiled by Bloomberg.
Under MACs, agencies hold competitions to pick multiple suppliers rather than a single provider. Once chosen for the pool, the contractors bid against each other for orders as specific needs arise.
“Buying an incumbent is always an option if you don’t win a spot on a contract,” said Mark Amtower, who owns a Highland, Maryland, firm that advises contractors on how to win government business. “It’s perfectly legal, perfectly ethical.”
Some small businesses view their positions on the multibillion-dollar umbrella contracts as a way to cash in, he said.
The government has taken some steps to prevent large companies from getting access to contracts through acquisitions of small businesses. A planned Department of Homeland Security contract for information technology, for example, contains a provision to remove companies that are purchased by large competitors.
IDL Solutions, which has 200 employees, received about a half-dozen acquisition queries annually before it won a seat on the $4 billion, multiple-award contract with the Centers for Medicare and Medicaid Services in 2007, Silva said in an interview.
The pace of buyout feelers picked up to at least one a week after the company in November beat fellow seat mates such as Hewlett-Packard Co. (HPQ) and Northrop Grumman Corp. (NOC) for a $59 million order on the health-care agreement, he said.
“Having the spot on the contract absolutely gets you attention,” he said.
General Dynamics bought its way onto the same deal by snapping up ViPS Inc., based in Baltimore, for $225 million in 2008. General Dynamics got its second slot in the agreement when it purchased Vangent Holding Corp. based in Arlington, Virginia, for $960 million in September.
Vangent was on the contract because it had purchased an original seat holder, Buccaneer Computer Systems and Services Inc. of Warrenton, Virginia, in 2010.
Top Selling Point
General Dynamics considers a “number of factors,” including a company’s presence on multiple-award contracts, when evaluating potential acquisitions, Mark Meudt, a spokesman for the Falls Church, Virginia-based company, said in an e-mail.
Computer Sciences, which already had a spot on the same contract, boosted its position in September by acquiring Maricom Systems Inc., a Baltimore-based company that specializes in health-care information technology.
“They weren’t trying to buy their way into the contract; they were trying to broaden their footprint” on it, said Chris Guckert, who was the Maricom’s chief operating officer and has remained in his role after the sale.
Maricom’s seat on the contract was “the No. 1 selling point,” Guckert said. At least eight other companies were interested in buying the business, he said.
“It is the ticket to the dance and there are a lot of companies that would covet having that ticket,” Guckert said in an interview. He also was a senior vice president at ViPS when the company was sold to General Dynamics.
A Defense Intelligence Agency contract for technology services also has attracted attention from big companies. Computer Sciences, based in Falls Church, Virginia, in 2010 acquired CenTauri Solutions LLC of Alexandria, Virginia, a small business that had a prime position on the agreement, called Solutions for the Information Technology Enterprise.
The contract with 11 companies is valued at as much as $6.6 billion during five years.
Mantech, an information-technology vendor in Fairfax, Virginia, in November paid $90 million for Seabrook, Maryland- based Worldwide Information Network Systems Inc., another vendor on the agreement.
The intelligence contract was “a big motivator in the attraction of those buyers to those companies,” said Marc Marlin, a director at investment bank KippsDeSanto & Co. in McLean, Virginia. He worked on both deals.
Three of the original five small companies are still on the contract, and “you would have to believe that those remaining small businesses would be attractive to people who do not” have a spot on the agreement, Bill Varner, president of Mantech’s cybersecurity and technology solutions division, said in an interview.
Some of the 15 companies selected last year for a $12 billion U.S. Department of Veterans Affairs contract known as T- 4 may become acquisition targets in about a year, once it becomes clear which companies are winning the most task orders, said Ed Meagher, a Computer Sciences vice president.
More than 90 vendors competed for the information technology contract and at least four that were excluded, including IBM Corp. (IBM), of Armonk, New York, sued or protested at the Government Accountability Office.
“There are certainly more companies calling us and wanting to find out what we are,” John Fraser, president of ASM Research Inc., a Fairfax, Virginia company that won a spot on the contract last summer, said in an interview. He declined to say whether the company has received acquisition offers.
At IDL Solutions, the would-be suitors never get very far with their takeover pitches, said Silva, the company’s senior vice president.
“We do entertain them, if you will,” Silva said. “Right now our focus really is on growing the company.”
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