I.T. Services Firms Find It Pays To Work For The Government

At the U.S. Department of the Interior's Washington headquarters, more than a quarter of the IT jobs are unfilled. That percentage could widen in the next five years because as many as half of the department's IT employees will be eligible to retire. "The shortages have caused us to significantly increase the number of contractors and outsourcers we use," CIO Hord Tipton says.

Interior isn't alone. Vacant IT positions are only one reason government agencies turn to private firms for tech services. The Bush administration expects agencies to hire outside firms when work can be performed less expensively and more efficiently. Plus, increased need for skills that many agencies lack, such as network security, ratchets up demand for outside services.

From January 2001 through March 2003, stock prices of publicly traded IT services firms that mostly cater to the federal government have increased by an average of 50%, according to financial-services company Raymond James & Associates Inc. Stock prices for IT services firms that focus on the private sector have plunged by nearly half during that same period, the company says.

Even before Sept. 11, 2001, valuations of government-oriented IT services firms began to diverge from those that concentrate on business. "As the commercial space began to deteriorate, many investors were badly burned," says Raymond James senior VP Donald Blair. With leaders like federal IT chief Mark Forman saying that it's time to modernize government technology and an administration that encourages outsourcing, stocks of the government-sector firms became more attractive. The gap in valuation between government and commercial IT services firms has widened since the Sept. 11 attacks because of expected increases in IT spending to support homeland security and defense efforts.

Since the beginning of 2001, big IT services firms have been on a buying binge, completing more than 70 acquisitions, according to Federal Sources Inc., a market-intelligence firm. Before Sept. 11, 2001, the value of the acquisitions hovered between six to eight times earnings before interest, tax, depreciation, and amortization, according to Raymond James. For the next 10 months, sales values edged up, ranging from seven to nine times earnings. In July, ManTech International Corp. bought Aegis Research Corp. for 14 times earnings, a price tag that shocked the mergers and acquisitions market, Blair says.

"Seller expectations were much higher after the Aegis deal was announced, and buyers reluctantly agreed to pay more," he says. Though they haven't reached the ManTech-Aegis level, prices through January have ranged from eight to 10 times earnings. Since February, as the United States prepared to invade Iraq, Raymond James found that an index of defense-oriented IT stocks has held steady, but those focused on civilian agencies fell by nearly 50%.

Public-Sector Payoff

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