Return to Virginia Business - March 2002

by Brett Lieberman

Last year's weakened economy, pummeled by recession and a terrorist attack, certainly took a toll on deal-making in the Old Dominion. Our annual look at the biggest deals for 2001 showed a drop in number of deals and a big drop in total dollar value for mergers and acquisitions. There were about 100 fewer transactions - 317 deals valued at $18 billion, compared to 413 deals in 2000, worth $146 billion. Of course the 2000 figure was skewed by the huge $101 billion merger of America Online and TimeWarner, the biggest acquisition in Virginia and the U.S. for that matter. AOL TimeWarner has seen profits tumble, while many high-flying Internet companies, which dominated our list of biggest deals just a year ago, have folded. With few exceptions, old economy businesses top this year's lists. Our information focuses on three areas: mergers, stock offerings and venture capital. We begin each category with a close-up look at that category's biggest deal.

Some people would call it a fatal attraction - the joining of the maker of stealth bombers with the only maker of nuclear aircraft carriers, the largest, deadliest weapons in the U. S. arsenal. But for Newport News Shipbuilding Inc., which for years fought off merger deals with unwanted suitors, the marriage boiled down to this: the offer was too good to refuse.

Virginia's largest merger deal in 2001 -one that had the drama of a soap opera - saw Los Angeles-based Northrop Grumman Corp. buying Virginia's largest private employer - 17,800 people work at the shipyard - for $2.6 billion. Northrop Grumman jumped in after archrival and would-be suitor General Dynamics made an all-cash offer that initially turned Newport News Shipbuilding's head. But Northrop Grumman ended up winning the shipyard's hand after the government made clear that it would block any union with General Dynamics on antitrust grounds. Newport News and General Dynamics Electric Boat are the only makers of nuclear-powered warships in the country. Northrop offered $67.50 per share in cash or enough shares of its common stock to provide an equivalent value - not a bad deal considering that just two years ago Newport News stock sold for $17 a share.

The acquisition positions Northrop as the leading defense contractor at a time when President Bush is promising the largest increase in military spending in 20 years. Northrop, a $15 billion global aerospace and defense company with 80,000 employees in 25 countries, serves U.S. and international military, government and commercial customers. It expects to benefit from increases in spending for homeland security and intelligence. It also should gain from additional spending on precision-guided weapons as well as replacing those used in Afghanistan.

The influx of government funding may prove critical to keeping Northrop and Newport News afloat after last year's fight for the shipyard. While General Dynamics offered a $2.1 billion, all-cash deal, Northrop's was made up of 75 percent of its own shares. The company also acquired Litton - owner of shipyards in Mississippi and Louisiana - for $5.1 billion. Consequently, by year's end Northrop's debt stood at $5 billion, compared to only $1.3 billion a year earlier. Though nobody has suggested that Northrop is at risk of bankruptcy, the Moody's Investors Service and Standard & Poor's Corp. investment rating firms have assigned the company their lowest investment-grade ratings.

William P. Fricks, the former CEO whose cost-cutting strategies turned the stodgy shipyard into a $2 billion-a-year revenue maker, retired a few months after the merger announcement.

Other major mergers of 2001 included:

AT&T Wireless Services Inc.'s $1.9 billion acquisition of the part of Arlington-based TeleCorp PCS Inc. that it didn't already own. It had always been in TeleCorp.'s plan to merge with the third-largest wireless carrier in the United States. TeleCorp., which had 914,000 subscribers in mid-size and smaller Southeastern and Midwest markets, had been buying spectrum licenses and helping to fill the gaps in AT&T Wireless' network.

Richmond-based utility Dominion's purchase of Louis Dreyfus Natural Gas Corp. of Oklahoma City for $1.7 billion. The deal increases Dominion's reserves by more than 60 percent and provides nearly 2 trillion cubic feet of proven gas reserves, and another potential 2 trillion cubic feet of natural gas, that could be drilled during the next 10 years. Dominion financed the deal with proceeds from $1.1 billion in debt offerings.

Charles E. Smith Residential Realty of Arlington was acquired by rival apartment developer Archstone Communities Trust of Englewood, Colo. for $1.2 billion. The deal, which involves the residential side of one of the Washington, D.C., metro area's largest real estate companies, creates the second-largest apartment real estate investment trust in the country. The new company, Archstone-Smith Trust, has a market capitalization of $9.3 billion.

Another North Carolina bank, this time Winston-Salem-based BB&T Corp., bought out F&M National Corp. of Winchester for nearly $1.1 billion. The transaction expands BB&T's presence along the Interstate 81 and Interstate 95 corridors into northern Virginia and the Richmond and metro Washington, D.C. markets.

Falls Church-based General Dynamics purchased Motorola's Integrated Information Systems Group for $825 million. The unit produces communications equipment for government and military customers. The deal continues General Dynamics' efforts to build its information technology business.

McLean-based candy maker Mars Inc. bought a 56 percent share of Royal Canin SA of France for $696 million. Besides producing candies such as M&Ms, Mars was already in the pet food business, owning Pedigree dog food and Whiskas cat food.

General Dynamics also purchased Fort Worth-based Galaxy Aerospace Co., a venture between Hyatt and Israel Aircraft Industries. The $668 million deal includes $315 million that General Dynamics would have to pay through 2006 if Galaxy achieves certain revenue targets.
Charles E. Smith Commercial Realty of Arlington, the largest commercial landlord in the Washington, D.C. region, agreed to sell the remaining 66 percent that Vornado Realty Trust did not already own for $598 million. The deal makes Vornado, one of New York's biggest property owners, also the fourth-largest U.S. real estate investment trust. Smith Commercial owns and manages 18.2 million square feet of office and retail space in the region.

Dimension Data Holdings acquired Web consulting firm Proxicom Inc.'s outstanding shares for $427 million. Dimension, South Africa's largest network services firm, won out after Compaq Computer Corp. ended its bid for Reston-based Proxicom.

United Defense heads list for stock offering
It's hard to find a firm better connected than United Defense Industries Inc., this year's leader in stock offerings. The defense contractor, bought by The Carlyle Group in 1997, claims a board of directors that includes a former chairman of the Joint Chiefs of Staff, a former defense secretary and advisers such as former President George H.W. Bush and former Secretary of State James Baker.
While such connections may have garnered some additional attention for United Defense's $401 million December offering, that's only part of the story. The company's offering, the first in the defense industry since 1996, could not have been better timed to tap the public markets and the attention of investors looking for something better than last year's anemic returns.

The Arlington-based maker of combat vehicles and weapons systems has been making tanks, amphibious assault craft and other weapons for the U.S. military since World War II. One product under development: the 40-ton Crusader self-propelled howitzer that sells for $23 million a pop. The company also is a major arms supplier to some 40 foreign governments.

Its success is showing up on the bottom line. Buoyed by Army purchases of its Crusader system, United Defense reported its fourth quarter profit rose 62 percent. Net income of $6 million on $405 million in sales during the quarter represented a 28 percent increase over the prior year. The company, along with much of the military-industrial complex, also expects to fare well in President Bush's proposed fiscal 2003 budget which calls for a 14 percent increase in military spending, the largest since Ronald Reagan's first term. In fact, two of the other top deals of last year - Anteon Inter-national Corp. and ManTech International Corp., both of Fairfax - are also military-defense companies expected to benefit from increased defense spending.

The administration wants to spend $3.8 billion over the next five years on the Crusader, with a large chunk of the money going to United Defense. Though the administration's proposal represents an enormous increase in defense spending, it may end up only being the starting point given the sense of patriotism pervading the nation and Congress' inclination to spend even more money on the war on terrorism. And United Defense's blue-chip connections can't hurt either.

Other big stock deals during 2001 included:

The $283 million that nonconforming mortgage lender Saxon Capital Inc. of Glen Allen received from its October offering. The former unit of Dominion originated $2.1 billion of loans last year and hopes the added capital raised will give it the resources to grow in the subprime lending market. Saxon buys loans issued to borrowers with spotty credit histories.

Like United Defense, Anteon's $230 million offering in December was snapped up on the expectation of increased defense spending and the promise of its information technology used in emergency response management by the Federal Emergency Management Agency and state agencies, as well as its ballistic missile defense systems. The capital will likely be used to pursue acquisitions.

When American Medical Laboratories, a medical testing company that performs complex and costly services such as genetic testing, screenings for sexually transmitted disease and routine medical procedures, first tested the IPO waters in September 2000, it found a slowing market. The Chantilly company withdrew its filing last spring only to refile in November to raise $115 million. It wants to use the proceeds to repurchase preferred stock and pay debts.

ManTech International Corp. of Fairfax is the third of four defense contractors nationally to go public late last year. The provider of high-tech manpower mainly to government intelligence agencies, ManTech filed in November to sell 5.7 million shares to raise $90 million. The proceeds will go to pay off debt, fund acquisitions and provide for working capital.

Reston-based Millennium Bankshares Corp., which has three branches in Fairfax County, filed in October to sell 1.2 million shares for $7.8 million. The community bank was founded in 1999. The offering has yet to be completed.

Netplex Group Inc. raised $6 million in the spinoff of its technology consulting business, Netplex Systems. The Reston-based company had hoped to raise at least $6.5 million, but cut the price because of the hostile market toward technology offerings.

Biotechnology companies attract investors
Burning through $600,000 a month, Aderis Pharmaceuticals (formerly Discovery Therapeutics), like a lot of biotechnology companies, needs a lot of cash. But while many high-tech companies found venture capital funding hard to come by last year, the Richmond company received two $45 million infusions to help fund its development of drugs to diagnose and treat Parkinson's, renal and cardiac diseases.
The funding topped the list of 84 venture capital deals worth $759 million in Virginia during 2001.

The investors included the Palladin Group, International Biotechnology Trust, Schroder Ventures Life Sciences, China Development Industrial Bank, MDS Capital Corp, NeoMed Fund of Norway, Perseus-Soros BioPharmaceutical Fund, Sanderling Biomedical Ventures, Singapore BioInno-vations and Temasek Capital of Singapore.

The funding is an enormous sum to a company that managed to leverage a $12 million budget, paltry by biotech standards, to get five drugs in clinical trials including a transdermal patch for Parkinson's disease. The patch, Rotigotine CDS, is currently in Phase III of the four levels of trails drugs must pass.

Founded as Discovery Therapeutics in Richmond in 1994, the company changed names to Aderis earlier this year and moved its corporate management and administrative offices to Hopkington, Mass., one of the nation's leading areas for biotechnology research.

Yet the company is far from pulling up stakes in Virginia. Aderis maintains 7,000 square feet of laboratory and office space in Richmond where it maintains research operations. Though drug development can take five years or more to move a product through the "pipeline" from testing to government approval and, finally, the market, Aderis believes the new investment will provide needed resources. After posting a $6.7 million loss in the nine months that ended on Sept. 30, 2001, Aderis is still looking for cash to fund its research and has announced plans for an initial public offering of as much as $100 million this year. The funds would go to additional research and development, clinical trials and acquisitions.

Other venture capital deals last year included:

EchoStar Communications, parent company of the satellite television provider Dish Network, boosted its stake in McLean-based StarBand Communications Inc. The $50 million investment increases its share in StarBand, which provides high-speed, two-way Internet connections through satellite dishes, from 19 percent to 32 percent. Echostar will eventually control 60 percent of the company when construction of StarBand's next generation satellites begins. Microsoft Corp. and other companies previously invested $275 million in StarBand, formerly Gilat-To-Home Inc. StarBand abandoned plans last March for a $287.5 million initial public offering. The proceeds would have been used to grow business operations, expand its subscriber base and for capital.
Fairfax-based Vibrant Solutions raised $26 million in first-round financing, led by Columbia Capital of Arlington and Bessemer Venture Partners. Vibrant, a provider of network management software, plans to use the funding for expansion, product development, research, and to build a European sales force.

In November, Vibrant acquired Longitude Systems, a telecommunications software maker. Chantilly-based Longitude had run out of money and dismissed its staff.

Sonic Telecom received $20 million from Mastel Ventures. The Chantilly-based telecommunications firm has now raised $34 million through four rounds of financing. Sonic Telecom owns a fiber-optic network and provides the equipment and services for video-conferencing. Earlier in the year it received $3.5 million in bridge financing from undisclosed investors.

Riptech Inc. of Alexandria raised $21 million in its second round of funding last year, bringing its total from Arlington's Columbia Capital to $45 million. Riptech is a computer network security firm that monitors clients' computer networks 24 hours a day, looking for cracks hackers could use to infiltrate a network.

eCommerce Industries Inc. of Vienna plans to use the $21 million raised last year to fund acquisitions of software systems. New Enterprise Associates led the funding for eCommerce, which develops e-commerce technologies for office products, industrial paper and sanitation markets. Other investors included Accel Partners, Frazier Technology Ventures and Friedman, Billings and Ramsey.

Intersect Software raised $18 million in first round funding led by Bessemer Venture Partners, Bluestream Ventures and Columbia Capital. Bessemer and Columbia had provided the initial $1.3 million in seed funding for the engineering management software firm in the spring of 2000.

Vienna-based BioNetrix, a developer of authentication software that works with smart cards, tokens, biometrics and other systems, raised $16 million in a third round of funding led by Columbia Capital, Advanta Partners, The Carlyle Group, The Dinner Club, NextLevel Group and Walker Ventures. Its technology allows remote access to personal and company data mainly in the health care and banking sectors.
ComScore Networks Inc. of Reston, which develops software to monitor and analyze consumers' Internet use, raised $16 million in a third round of investment. The investment was led by Adams Street Partners of Chicago and included existing investors Accel Partners, Flatiron Partners, Institutional Venture Partners and Lehman Brothers. ComScore has now raised $57 million in three rounds.

Danville-based R2 Technology raised $14 million, bringing its total financing to $76 million. The company developed the only FDA-approved computer-aided detection system for mammography. Its technology helps radiologists in the early detection of cancer. The financing will help the company expand its market position. Investors included Morgan Stanley, GE Capital, ARCH Venture Partners, Alta Partners, Sigma Partners and Thorner Ventures. New investors included China Development Industrial Bank, UOB Hermes Asia Technology Fund and United Investments. R2 Technology recently filed plans for an $86.2 million initial public offering.

Return to Virginia Business - March 2002