Northrop Advances in Federal IT

Northrop Grumman Corp. continued its march upon the federal information technology marketplace with its US$150 million cash purchase of Sterling Software (U.S.) Inc. and may well have other companies in its sights, analysts say.

The purchase marks Northrop's fifth acquisition in the government IT sector and will provide yet another boost for Logicon Inc., a Northrop Grumman company. Northrop announced Sept. 6 the pending purchase of Federal Data Corp., a software solutions provider.

Although analysts were surprised by the announcement, they were not displeased.

"Northrop Grumman is very strong on the defense side of things, and Sterling's strength is in the intelligence area, so it is a good fit," said Philip Kiviat, president of the Kiviat Group, a Potomac, Md., sales and marketing company catering to IT companies in the federal sector. "It's not at all unexpected. Sterling needed to be in a company like Logicon that has been successful and knows how to do business in the market Sterling is in."

Sterling U.S., also known as Sterling's Federal Systems Group, is a wholly owned subsidiary of Sterling Software International Inc., which is in turn a subsidiary of Computer Associates International Inc. The company had 1999 revenues of $159 million and specializes in intelligence systems; command, control, and communications; air traffic management; weather systems; and modeling and simulation.

Sterling customers include national intelligence agencies, the Air Force, the Federal Aviation Administration, NASA, the Defense Information Systems Agency, the National Security Agency, and the National Oceanic and Atmospheric Administration.

"Combined with our pending acquisition of Federal Data Corp. and our recent acquisition of Comptek Research, Sterling's Federal Systems Group is yet another example of our strategy to focus on our high-growth business areas," said Kent Kresa, Northrop Grumman's chairman, president and chief executive officer, in a written statement.

Sterling is expected to provide further growth in the state and local government and commercial markets.

The acquisition may not be the last on Northrop's wish list, according to Phil Finnegan, senior analyst at Fairfax, Va.-based Teal Group Corp., a defense and aerospace research and consulting firm.

"Traditionally, Northrop Grumman's information technology business has been heavily focused on areas like weapons testing and simulation, but this acquisition strengthens their position in some key markets," Finnegan said. "Intelligence agencies are key because the customers are loyal and tend to keep coming back and because the contracts are typically of higher value than other government contracts. And state and local markets are key because they have a higher growth rate than the Department of Defense."

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