If
publicly held defense contractors are the new darlings
of Wall Street, then Northern Virginia is their
Cupid. Since last October, eight defense-contracting
firms have filed for initial public offerings (IPOs)
of stock. All but two are based in Northern Virginia.
A
plus for the Old Dominion firms is that they specialize
in high technology. So far, their satellite communications,
reconnaissance systems and other gizmos have been
the stars of Operation Enduring Freedom, rooting
out terrorists responsible for the attacks on New
York and the Pentagon last year.
Basking
in the glow of battlefield victories, companies
such as ManTech International Corp., Anteon Corp.
and SRA International Inc., all of Fairfax, are
going public with eye-popping results. Investors
are betting that these stocks can produce stable,
if unspectacular, returns. One big question looms,
however: Will the surge to defense IPOs create the
same kind of over-inflated bubble that hurt other
high-tech wunderkind such as Internet companies
and telecommunications firms?
For
now, the big push towards defense high technology
has launched the richest defense-sector market for
IPOs since Ronald Reagan was in the White House.
During that defense buildup, some 20 defense contractors
went public with an average offering size of about
$15 million.
Today,
the offerings are far greater, averaging $220 million,
an order of magnitude 15 times more. "The valuations
and the market cap of these companies that have
gone out recently are much bigger, even when adjusted
for inflation. What we're seeing is bigger companies
raising more money at higher pricing relationships
than at any time in history. That's the essence
of how good this market is," says Jerry Grossman,
managing director of investment banking firm Houlihan
Lokey Howard & Zukin in McLean.
Going
public had long been the dream of Ernst Volgenau,
who launched SRA International Inc. in 1978. During
the 1980s, SRA was too young and its market capitalization
too small to interest investors. After the Soviet
Union collapsed in 1991, U.S. military spending
was curtailed, giving defense stocks even less cachet
with investors. "We contemplated going public
off and on over the years, but never believed the
prices for our stock reflected the true value of
our company," says Volgenau, whose firm provides
consulting and systems integration services to the
Department of Defense and other federal agencies.
Finally,
in May, the timing was right. Roughly eight months
after terrorists struck, SRA made a resounding debut
on Nasdaq. Investors enthusiastically snapped up
4.4 million shares of SRA stock for $18 a share,
netting the company proceeds of $79 million. By
the end of the first trading day, SRA shares closed
up nearly 11.5 percent - by no means a record, but
given the market's flaccid state, something to cheer
about. Nor was it a one-day market anomaly. SRA
stock continued to climb, selling 40 percent higher
than its offering price.
SRA
is the third Virginia military IT services company
this year to come up swimmingly in the equities
market. Earlier this year, ManTech International
Corp. and Anteon Corp., raised $115 million and
$270 million, respectively. Their shares also are
trading at prices higher than their opening-day
offering. And the rush to market isn't over. Veridian
Corp. of Arlington and SI International of McLean
have filed stock-sale plans with securities regulators
and are expected to begin trading later this year.
Veridian hopes to raise $216 million while SI is
angling to sell $75 million worth of stock.
Anteon
typifies the allure of defense companies these days.
Investors scooped up 4.7 million company-sold shares
on its first day of trading on the New York Stock
Exchange in March. The stock kicked off at $18 -
Anteon was only the second company this year to
upsize its offering price prior to its debut - and
has been selling more than 30 percent higher than
its opening. Or, consider ManTech International.
It premiered on Nasdaq in February by selling 7
million shares - 1.2 million more than it planned
to offer. The stock opened at $16, near the top
of its offering range, and share prices have nearly
doubled since. CACI International went public back
in 1968, but managed to take advantage of the current
climate to issue a second offering. In March, CACI
scored $171 million in a secondary public offering,
perhaps smoothing the path for other companies to
go public.
To be sure, most of the companies filed for their
IPOs before Sept. 11, but there's no question the
attacks "created a new emphasis on IT spending
by the federal government, and that drew more public
investors," says Ray Bjorklund, vice president
of consulting services for Federal Sources Inc.
in McLean, which advises technology vendors wanting
to sell to the government. The market should stay
strong. Research
firm Input of Chantilly predicts some $63 billion
in federal expenditures on systems and IT services
by 2007, with five agencies - defense, justice,
transportation, treasury and the National Aeronautics
and Space Administration - accounting for nearly
70 percent of the spending. An added attraction:
Publicly held defense companies are subject to a
welter of complex procurement rules and regulations.
Auditing is tight and ongoing. "It's not the
Wild West, where companies can make things up as
they go along," says Grossman.
Not
all of Virginia's IT contractors are in a hurry
to exchange equity for investor dollars. The defense
market lacks maturity, so it's difficult to predict
how investors will react to even the slightest hiccup.
If one defense company were to miss a quarterly
earnings projection, for instance, all public companies
in the sector could suffer, says Paul Lombardi,
chief executive officer of Fairfax-based DynCorp,
a privately held systems firm with $2.2 billion
in revenue. "I'd like to see a couple more
quarters for the maturity of the sector to take
hold, maybe even a year and a half," says Lombardi.
There
are risks if investors run from one "big thing"
to another like lemmings. Therein lies the danger
for newly minted public companies. How long will
it be before IT investors start sniffing around
for higher margins, especially since "the national
economy is expected to recover and recover well?"
asks Bjorklund.
Even
so, this doesn't seem like another looming dot-com
disaster with fantasy-revenue expectations. Only
a few companies possess the expertise and experience
to win IT defense work and gain the momentum needed
to push them public. Virginia IT companies, benefiting
from their proximity to the Pentagon, will help
shape the nation's defense and security. War may
be hell. For Virginia's freshly anointed public
IT companies, it also is big business.
Return
to Virginia Business - August 2002
