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Wireless Facilities, Inc. Acquires Madison Research
Corporation
It's been nine months since the Base Realignment and Closures
(BRAC) Commission Report to the President was released last
November. That report represented bad news for many
communities across the country, but not for the Huntsville,
Alabama metropolitan area. As a result of the BRAC process,
Huntsville is projected to gain 2,925 jobs.
In the context of the military-space megalopolis that is
Huntsville, those 2,925 jobs represent a gain of only 1.2% in
the context of total industry employment of more than 225,000
jobs. But an outsized proportion of those gains are coming from
civilian (read: NASA) and contractor employment. Military
employment is actually expected to fall by nearly 1,000 jobs.
The bottom line: it's a good time to be one of Huntsville's
many, many technical and engineering services contractors.
Readers of this service, with their keen instinct for the bottom
line, have taken note of the good news contained in the BRAC
and have been having a field day bagging acquisition
candidates in Huntsville's sprawling contractor community.
There have been four major acquisitions in Huntsville since the
BRAC report hit the street: Ducommon's $50 million purchase
of Miltec Corp. in January, Stanley Associates' $50 million buy
of Morgan Research Corp. in February, EDO's $175 million buy
of CAS, Inc. in July, and now the $69 million purchase on the
part of WFI. With four months remaining in 2006, the year is
already the most active for Huntsville companies in the history
of this service (as measured by volume of deals; 2003, with
the $543 million acquisition of Integrated Defense Technologies,
remains the biggest year as measured by money spent).
The acquisition of Madison Research is the fourth deal by WFI,
a company headed by Titan Corp. alum Eric DeMarco. Since
hiring on with WFI in 2003, Mr. DeMarco has plunged the
commercial wireless provider into the federal marketplace, a
decision that has provided the company with the sole silver
lining in a darkening financial picture. The company's stock has
plunged from a high of $18.44 in January 2004 to only $2.29 on
the day before the Madison Research deal was announced. In
the three days after the announcement of the Madison
Research deal, shares declined a further 20 cents, or nearly
nine percent.
The current drop in the stock isn't due to the acquisition,
however — it's due to the red ink which the company
reported on the same day. For the first half of 2006 the
company's Government Network Services (GNS) business
reported revenues of $41.0 million and operating income of
$3.9 million. The bottom line was taken into negative territory
by large operating losses in both of the company's other two
commercial segments, however — and that goes a long
way towards explaining the decision to buy Madison Research.
This is an extremely conservative deal. It upends the guidance
given by Eric DeMarco two years ago in an interview with this
service (appearing in the April 2004 issue of DM&A). At that
time Mr. DeMarco said that WFI's federal acquisitions filters
were closely aligned with the company's commercial business
— i.e., WFI was looking to acquire federal contractors
involved in RFID, wireless sensors and networks, and spectrum
management. And the company's three federal deals did indeed
fall within those parameters.
But now comes the Madison Research deal — and if the
acquired company is involved in anything wireless, it's keeping
the information closely held. Madison Research is a typical
Huntsville contractor — a provider of technical,
engineering and information technology solutions to AMCOM,
SMDC, PEO Missiles and Space, PEO Aviation, NASA Marshall,
etc. This acquisition is less about inserting WFI's technology
into the federal marketplace than it's about inserting MRC's
steady profitability and revenues into a buyer which is in sore
need of steadiness right now. The fact that it brings the
company's customer base (hitherto heavily skewed towards
Navy work) into balance with Army and NASA contracts is a
nice bonus.
Going forward, we look for further deals like this one from WFI
(each of the customers it is gaining will be in some stage of
wireless implementations). The only thing holding it back will
be its ability to convince lenders like KeyBanc to finance
further government buys. If the candidates are like Madison
Research, we doubt it will have much trouble doing so. Looking
beyond the BRAC, recent developments in North Korea and
Lebanon have underscored the need to continue making
progress in missile defense. For Huntsville, missile defense
capital of the Western world, that means the good times will
just keep rolling.
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