Titan Spinning Off a Little Giant (News) December 30, 1999

Titan Spinning Off a Little Giant

By Richard McCaffery (TMF Gibson)
December 30, 1999

Information technology, services, and satellite communications company Titan Corp. (NYSE: TTN) made good on its pledge today by announcing plans to spin off its business software unit early next year.

Under the plan, Titan will raise up to $70 million by spinning off a minority interest in Cayenta Inc., a company that hosts and manages finance, accounting, customer billing, e-commerce, and other business applications. Cayenta filed a prospectus yesterday at the Securities and Exchange Commission.

Investors liked the move, a first strike by the diversified company to unlock shareholder value. Titan jumped up more than $4 in early trading and came within two points of its 52-week high.

It's a little challenging for investors to get their hands around Titan since it has four core business units: information technology, electronic business, wireless systems, and food pasteurization. Wall Street doesn't care much for such diversified companies, which is probably one reason Titan plans to spin off additional units.

But Titan, primarily a defense department contractor specializing in information technology, has convinced investors it can grow its commercial business. Currently about 75% of its profit comes from the government.

Lots of government contractors that tried to leverage their expertise into commercial markets failed. The public and private sectors are two different worlds, and its tough to develop the skills needed to address a new set of customers.

Investors must realize Titan still has to prove it can deliver on this promise

But Titan's stock has jumped from $4 3/4 to about $45 this year, good for an 847% gain as the company grew sales, turned profitable, reduced debt, and made a flurry of acquisitions. This kind of gain may pale in comparison to Qualcomm's (Nasdaq: QCOM) achievements, but it's practically unheard of for a government contractor.

Strange as it may sound, Titan's secret weapon may not be its software unit or its communications expertise. Rather, it's the patented medical sterilization technology the company has developed. Titan has found a quick, clean, and easy method of sterilizing meat products.

Basically, its SureBeam electron-beam unit is designed to sit at the end of a processing line to rid hamburger, chicken, and other meats of E-coli bacteria, Salmonella, and other agents. The Food and Drug Administration recently approved using electron-beam technology as a way of sterilizing food.

Why all the fuss about this technology, especially since it's not yet generating serious revenue? According to a First Union research report, Titan has just about locked up the market. It has agreements with companies representing 75% of the U.S. ground beef market, and 45% of the poultry market. The margins on e-beam sterilization are high, and Titan has no real competition in the industry. The other method used to sterilize food is gamma radiation, often a more expensive and slower process.

While spin-offs can unlock value, the question regarding Cayenta is a familiar one. Why should investors swing from a branch when they can sit in the tree? True, Titan could become unwieldy at some point with multiple businesses, but until it's clear which will bloom, isn't it smarter to stick with the parent company, especially since it plans to maintain a majority position in the businesses it spins off?

Titan is a company that's worth a closer look, but keep in mind there are plenty of risks. First, it's priced to succeed brilliantly. Second, it has to prove there's sustainable demand for its products and services outside the government, and that each business unit has the management team to execute its strategy.

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