When companies merge, agency partners change

John Gilligan, former CIO of the Air Force, admits to feeling a 'shock to the system' when Oracle Corp. bought PeopleSoft Inc. in January 2005.

His biggest concern: How long would Oracle continue to support the PeopleSoft products that are at the heart of the Defense Integrated Military Human Resources System, a project that might not fully roll out for two or three years?

Oracle offered assurances, but 'it was understood that Oracle's assurances might be more short-term than long-term,' said Gilligan, now a vice president and deputy director of the defense sector at SRA International Inc. of Fairfax, Va.

'If you're in the middle of a big systems development and you have a radical change of people, that can keep you awake at night,' said Sandra Bates, Topside Consultants LLC executive consultant and a former commissioner of the General Services Administration's Federal Technology Service.

Shopping spree

In 2005, there were 100 closed acquisitions involving government services companies, ranging from multibillion-dollar companies such as L-3 Communications Inc. and Titan Corp. to numerous smaller deals. The pace is not expected to slow in 2006.

Lockheed Martin Corp. announced in January its plans to buy Aspen Systems Corp., a Rockville, Md., company that offers business process and technology solutions.

During the same month, Raytheon Co. acquired Houston Associates Inc. of Arlington, Va., which develops networks and network-centric command and control infrastructure applications, and provides enterprise management services.

And as an early front-runner for the biggest deal of 2006, General Dynamics Corp.'s $2.2 billion acquisition of Anteon International Corp. is expected to close in early summer.

Among the questions mergers and acquisitions raise in the federal government: Will the acquiring company continue to perform on my contract at the same level? Will management and key people change? Will the acquiring company devote equivalent resources? Will there be more bureaucracy to deal with? How will ongoing services be affected?

'It's certainly fear of the unknown,' said Angela Styles, a lawyer who specializes in federal procurement law and litigation at Miller & Chevalier, a Washington law firm, and former administrator of the Office of Federal Procurement Policy.

Another big concern is that more mergers could mean less competition. Federal agencies 'don't like to see the marketplace go to one contractor or only a couple of contractors, because that cuts down their choices and cuts down on competition,' Styles said.

But that concern might be overblown. Despite the number of M&As'more than 200 in the last two years alone'agencies still have ample choices, some experts say.

'Look at how many contractors are on GSA schedules. Cut that 50 percent because of M&As, and you still have far more choices than you will ever need,' said Robert Welch, partner and senior policy adviser at Acquisition Solutions Inc. of Oakton, Va., and a former procurement executive with the Commerce and Treasury departments.

Mergers raise serious concerns about the impact they can have on the agencies, but former federal procurement and IT executives say the transactions also can be positive, presenting more opportunities for government customers.

'Bent over backwards'

With three big mergers in their market area, telecom companies have taken great measures to assure their government customers that there will be no service disruptions and that delivery intervals will remain the same or improve, Bates said. 'They've bent over backwards to do that.'

The acquisition of smaller IT companies by systems integrators can be a welcome change for federal agencies. In some cases, a larger acquirer that has been a government contractor for many years will impart its code of ethics and its corporate and compliance structure to the smaller company, which might not have had them, Styles said. This could make the smaller company more appealing to government customers.

Acquisition of smaller IT companies by systems integrators also can let government agencies take advantage of innovative technologies that the smaller ones offer.

One of Gilligan's frustrations as Air Force CIO was not having the manpower to vet the hundreds of small companies that wanted to do business with the Air Force, he said. He encouraged them to talk to big companies that were engaged in systems integration work for the Air Force. In some cases, these large contractors took on the smaller companies as subcontractors or ended up buying them.

'That's a healthy dynamic,' Gilligan said. 'For large agencies, that's often the best route if the integrators are willing to look outside their own fences to take advantage of emerging ideas and technologies.'

Roseanne Gerin is a staff writer for GCN's sister publication Washington Technology.