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Government IT Review - Cynthia L. Webb
Fall of the Titans?


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By Cynthia L. Webb Staff Writer
Thursday, July 1, 2004; 11:39 AM

When Lockheed Martin Corp. announced last Saturday that it was pulling the plug on its $2 billion acquisition of San Diego-based Titan Corp., it was hard to say which company was hurt the most.

Many news outlets portrayed the news, understandably, as a big blow to Titan. "After years of transactions, Titan was set early this year to make its climactic deal, the sale of itself to Lockheed Martin Corp," The Wall Street Journal said in a front-page article on Monday. The sale "imploded bitterly over the weekend because of an unresolved bribery investigation involving operations that Titan recently took on in its push to expand. Meanwhile, Titan has been singed by controversy over possible involvement in inmate abuse at Iraq's Abu Ghraib prison by two translators it provided to the military. The collapse of the Lockheed deal suggests the hazards of a shape-shifting business model that several defense contractors have adopted." The Journal noted that Titan and other contractors have morphed their business lines from dot-com incubators to homeland security work to fit with the changing tide of defense dollars.

But Lockheed Martin was a loser in this too. According to The Washington Post, Lockheed "prized Titan for its growing information-technology business, which includes programs with intelligence agencies. About 8,700 of Titan's 11,000 employees have security clearances, an important selling point at a time when intelligence programs are among the fastest-growing defense sectors and applications for new clearances are backed up for months. ... But Lockheed did not want to inherit legal responsibility for a violation of the Foreign Corrupt Practice Act, which prohibits U.S. companies or their agents from bribing foreign officials to win business, particularly because bribery has been an issue for the company before. In 1995, Lockheed Corp., a predecessor to Lockheed Martin, pleaded guilty to conspiring to bribe an Egyptian politician for help in securing a contract for three C-130H cargo jets," the Post said.

Titan is putting on its game face over the collapse of the deal. Gene W. Ray, the company's chairman and chief executive, released a statement on Saturday: "I am disappointed that we were not able to complete the merger as we set out to do nine months ago. Going forward, we will be able to focus all our energy and resources on providing the highest quality product and services to our customers for the benefit of our country," he said. "Titan is financially strong, and today has a backlog in excess of $5 billion in U.S. Government contracts. ... Titan has successfully competed against the largest defense contractors on numerous occasions, including most recently the large 'US-VISIT' contract won by the Accenture team, in which Titan is a major subcontractor. This win will further bolster our backlog in 2004."

Anxious Investors and Analysts

Despite the optimistic attitude of Titan's executives, investors have not been as bullish on the company since the Lockheed deal fell through. "Titan shares on Friday lost 22% of their value as investors feared Lockheed would call off the deal. The shares fell from a 12-month high of $21.99," Dow Jones Newswires reported on Monday. The stock failed to regain ground this week, closing Wednesday at $12.98.

According to a San Diego Union-Tribune report, financial analysts have indicated concern about Titan's financial prospects. "Titan faces significant financial and operating challenges as a stand-alone company," wrote analyst Cynthia Houlton of RBC Capital Markets in a research note. "Analyst Adam Weiner of Credit Suisse First Boston took a similar view," the Union-Tribune said, "writing that 'lingering uncertainty' surrounding the federal inquiry and Titan's 'management distractions' raised questions about the company's performance. But Weiner saw room for optimism if Titan can settle the federal investigations and show that its operations are indeed stabilized. 'There remains the possibility that another suitor for Titan emerges at some point, particularly if pending federal investigations are resolved and a credible earnings outlook restored,' Weiner wrote."

And Reuters noted that "Standard & Poor's Ratings Services lowered its CreditWatch listing on Titan to 'negative' from 'developing' and said it may now cut Titan's long-term debt rating."

Still An Acquisition Target?

Titan remains an attractive target for other defense contractors intent on rounding out their homeland security and defense teams. "Titan ... will be wooed by other defense companies, likely including General Dynamics Corp. or Northrop Grumman Corp., or even Lockheed, analysts said, but not until the government investigations are completed," Dow Jones reported. "We expect consolidation will continue in the Government IT/Services sector and Titan is likely to be targeted within the next 12 to 24 months," analyst John Mahoney at Raymond James & Assoc. wrote Monday, the article said.

The Associated Press said analysts were "unclear what would happen to Titan after the deal was terminated. Other defense contractors could try to acquire Titan, or Lockheed could make another bid to keep it from getting into the hands of competitors. 'They could come right back after this deal is dead the next day and make another offer,' said Paul Nisbet of JSA Research." Meanwhile, Lockheed spokesman Tom Jurkowsky "said while Titan was an attractive prospect, the company does not feel it will lose out to competitors by choosing not to go through with the merger. 'While Titan would have complemented our existing capabilities, we don't view it as critical to our continuing success,' in information technology, he said."

Titan is already playing coy about other deals. "Then, as now, Titan was not -- and is not -- looking to be acquired," Wil Williams, Titan's vice president of corporate communications, told Washington Technology. CEO Ray repeated this sentiment in an interview with Bloomberg. "When asked whether he expected other offers, Ray said, 'I don't know how to forecast that at all; I just know that we are not for sale.' Titan still has 'a fiduciary responsibility' to consider offers if they are presented, he said," according to Bloomberg.

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