L-3's Titan Purchase Leads IT Deals

When Frank C. Lanza first looked at Titan Corp., two years before Lockheed Martin Corp.'s 2004 attempt to buy the San Diego company, he was not impressed.

"I didn't like Titan. I didn't like what they were doing. I didn't like their strategy," said Lanza, chairman and chief executive of New York-based L-3 Communications Holdings Inc. But after Lockheed's deal fell through, Lanza took a second look.

"They had changed dramatically in structure and they had gotten big time into the intel world, which we are in big time, too," he said. Titan's revenue had grown from about $1 billion to $2.5 billion. "But they had one big wart," Lanza said.

That wart was an ongoing investigation into allegations that some Titan officials used bribery to win foreign business.

Lanza had a remedy. He went to Titan's board, quoted a purchase price and offered to help settle the Foreign Corrupt Practices Act allegations.

"If we could do that, we at L-3 could make a tremendous acquisition," he said.

Attorneys for Titan and L-3 worked with the government on the problem while another L-3 team handled the other usual due diligence activities. When the two companies announced the deal in June, a plan was in place to settle the allegations and Lanza had his $2.6 billion acquisition.

The transaction captured the attention of a panel of merger and acquisitions experts who rated it the top information technology deal of 2005. The panelists created their rankings from a list compiled for Washington Technology by Houlihan Lokey Howard & Zukin of 100 government services acquisitions that closed during 2005.

Although the L-3-Titan deal was the largest of 2005, size wasn't a deciding factor for the panel. Titan's long history -- Gene Ray founded the company in 1981 -- and its reputation as an aggressive acquirer on its own helped make its acquisition noteworthy. The deal also helped L-3 grow its government services business to more than $3 billion, making it a major IT player to complement its communications products and solutions business.

Others top contenders included Nortel Network Corp.'s acquisitions of PEC Solutions Inc. of Fairfax and Qinetiq Group PLC's pick-up of Apogen Technologies Inc. of McLean, the number 2 and 3 deals of the year, respectively.

The 2005 deals reflect the range of buyers -- from foreign-owned companies such as Nortel and Qinetiq, to private equity groups such as Veritas Capital Fund LP and small companies such as Indus Corp. -- that are making deals. Veritas acquired parts of DynCorp, and Indus made a pair of deals signaling that it is a consolidator.

The 100 deals in 2005 lag behind the 106 transactions that closed in 2004, but are still well ahead of 2003's 82 deals.

What these companies are buying shines a spotlight on the fastest growing segments of the government market and where companies are investing for future growth.

Lanza saw 5,000 Titan employees with security clearances -- hot commodities for any company doing defense and intelligence work.

Qinetiq of Farnborough, England, needed Apogen to create a U.S. IT division to go after the American defense and civilian market. "The scale and scope of U.S. federal and defense budgets are significantly higher, compared to British or European budgets," said Apogen chief executive Paul Leslie.

Nick Wakeman is editor of Washington Technology and Ethan Butterfield is a staff writer.