Xerox Corp. yesterday announced that it had purchased a minority stake in Federal Data Corp., a Chevy Chase company that packages computer systems for the federal government.
While terms of the transaction were not disclosed, Xerox reportedly paid between $12 million and $15 million for an 11 percent share of the privately held firm.
The deal represents an effort by Xerox to become a major marketer of computer products to the federal government. That market is now running at a $15-billion-a-year clip.
Richard C. Palermo, vice president of business planning for Xerox's Business Systems Group, termed the investment "a significant move for us. It is our intention to establish a presence in that marketplace. It's an attractive business."
Currently, the bulk of Xerox's federal revenue comes from its line of copiers.
With annual revenue in excess of $100 million, Federal Data is widely regarded as one of the more aggressive bidders for federal data-processing contracts. The company specializes in "systems integration" -- that is, blending computer hardware and software services into a complete system tailored to customer specifications. Systems integration is one of the fastest-growing segments of the computer industry, and the govenment increasingly is buying computer products that require systems integrators.
The federal systems integration market "is growing at a 50-percent-a-year pace," said Robert A. Dornan of Federal Sources Inc., a Vienna company that tracks the federal computer market. He estimates that at least one-quarter of government computer system purchases are made from integrators.
However, there has been a wave of mergers and consolidation recently in the system integration market. For example, H. Ross Perot's industry-leading EDS is a wholly owned subsidiary of General Motors Corp.. Similarly, Burroughs Corp., a major federal computer systems contractor, soon will merge with Sperry Corp.
"We're competing against EDS, Burroughs, IBM and the like," said Federal Data President Daniel R. Young. "You have to spend millions just for the opportunity to play in the game, so we wanted a strategic ally."
The Xerox relationship will boost Federal Data's financial resources, while also giving the systems integrator access to Xerox's state-of-the-art technology in at least two fast-growing areas: desktop publishing and artificial intelligence systems, Young said.
"The time is right" for marketing electronic publishing to the government, he said, noting that there are several large contracts to be let soon for such systems. "It's an enormous market. The government requires a lot of 'printing on demand' for everything from reports to training manuals."
Xerox, with its strengths in laser-printing technology, is widely regarded as a technical leader in electronic publishing.
"It looks like a very smart move," said Gartner Group analyst Nancy E. Erskine.