Titan moving on after sale to Lockheed falls through.

Executives and employees of Titan Corp., the San Diego-based defense contractor, are emerging from a marathon year.

Lockheed Martin Corp. walked away from its $1.66 billion acquisition proposal, leaving Titan to go forward as an independent company. In addition, both the U.S. Department of Justice and the Securities and Exchange Commission are investigating allegations that Titan made illegal payments to consultants used to generate business in several foreign countries.

And, translators hired under a Titan contract have been mentioned in an Army report critical of conditions at Iraq's Abu Ghraib prison, though the government has not charged Titan with any wrongdoing. Titan provides 4,200 translators to the Army worldwide, under a contract that is up for routine renewal.

Interviewed last week, Titan Chairman and Chief Executive Gene Ray declined to answer questions about the federal investigations.

Question: How have you prepared for the contingency of Titan continuing as a separate entity?

Answer: We actually did have a contingency plan put together of the important things to do, which is communications with our employees, with our customers, with the media, with the Street.... We've been following that plan pretty closely.

Q: Do you feel that pursuing the merger has been a drawback to Titan, in that you could have put your energies into something else?

A: Let me put it in perspective. (Our) 2003 revenues were up 26 percent over 2002 revenues. That is organic growth--internal growth. Looking at the first quarter of this year, internal organic growth was 21 percent over the first quarter of last year. So, it's not bad growth. Would it have been more without the acquisition? Definitely yes. How much more, I don't know. There's something called OCI--operational conflict of interest--where Titan would be working on the conceptual development phase of some new system that Lockheed might be bidding on, competing for down the road. And the customers just wouldn't allow that to occur. So we lost business as a result. And so, yes, our business would have been greater without it.

Q: Would you have done anything differently knowing what you know now?

A: I would do something different every day, if I knew what was going to happen during that day. (Laughs.) My decision-making would be much better if I had 20-20 hindsight. I think that would be true for most people.

Q: Did Titan have any discussions with Lockheed Martin about decreasing the price Lockheed would pay?

A: No.

Q: Titan's translator contract has given you some bad press. Has that contract been worth the headaches?

A: The contract has definitely been worth the headaches, principally because we have provided a very critical service for our country, for our military. And we're very proud of what our people have done.

Q: Titan has changed its emphasis over the years. What direction is the company taking in the future?

A: Our job is to provide national security solutions. Ninety-eight percent of our business is there now, but you'll see an even stronger focus than that. We're not changing our strategy going forward.

Q: Is the company for sale?

A: The company was not for sale when Lockheed came and approached us. The company is not for sale today. Our board--as is every other public company board--has a fiduciary responsibility to its share-holders to maximize value, just as we talked about. But the answer to your question is a simple "no."

Wall Street's View

TITAN Corp., whose failure to resolve a U.S. bribery probe doomed its takeover by Lockheed Martin Corp., may be an "attractive acquisition candidate" again within six to 12 months if a resolution is reached on the probe, said Timothy Quillin, an analyst at Stephens Inc.

Lockheed, which wanted to bolster its role as the largest supplier of computers and related service to the federal government, was attracted to Titan because of its 8,800 technicians with security clearances. Northrop Grumman and General Dynamics compete with Lockheed for government computer-services contracts.

Defense companies may be reluctant to make an offer for Titan right now because valuations have dropped on concerns about the outlook for U.S. defense spending amid rising federal deficits.

"If you were to sell out, you wouldn't want to do it by choice right now," said Mark Jordan, an analyst at AG Edwards & Sons Inc. in St. Louis.

"You tend to want to sell when valuations are rich or at premiums, and it's clearly not at these levels right now."

Shares of Titan have fallen 41 percent from their high of $21.90 in January. To get its share price back to $18 to $20, or for another suitor for Titan to emerge, there will have to be a resolution of the investigation, Credit Suisse First Boston analyst Adam Weiner said in a note to clients.

The Department of Justice is believed to be seeking a settlement that includes a fine "significantly more" than the $3 million Titan reserved for the purpose in March, said Cynthia Houlton, an analyst at RBC Capital Markets in New York, who has an "underperform" rating on Titan.

The collapse of the Lockheed agreement may prolong the process of reaching a settlement in the case, according to analysts. Titan still has an incentive to settle to avoid a trial and the risk of being barred from future government contracts, one penalty allowed under the Foreign Corrupt Practices Act.

--Bloomberg News

BRAD GRAVES San Diego Business Journal