Government contracting creating millionaires

WASHINGTON — Harry "Pete" Howton, the son of an Air Force officer who grew up to be a Navy man and a basement entrepreneur, banked about $50 million last year when he sold his 10-year-old government technology company.

There were no opulent parties. He didn't buy a new house or start a yacht collection. Every morning, Howton wakes up and goes to work. He's not even sure his neighbors know he is a wealthy man.

"We've become nouveau riche, which is wonderful in some ways, but we've got to keep our feet on the ground," said Howton, 63, whose extravagances included the installation of a twirling neon slide to carry his two daughters between floors of the suburban Falls Church, Va., home he bought with his wife 16 years ago.

The growth in government contracting has transformed the Washington, D.C., region, pumping billions of dollars into local companies, luring workers from around the country, inflating home prices and taxing already-crowded roads. It has also created a new class of multimillionaires — entrepreneurs like Howton who started small companies, expanded them, then sold them at premium prices.

If the government's influence here has led to steady jobs and pensions for the federal work force, it is changing to include another dimension: catalyst for private wealth.

"There has been a lot of trapped, passive equity released — released to the owners and to the local economy. Without a doubt, it's billions of dollars," said Rick Knop, managing director of BB&T Capital Markets/Windsor Group, a company that helped negotiate the sale of 20 local government contractors in 2005.

Exactly how many billions is hard to estimate. Many of the 70 or so local government contracting mergers last year involved private companies that are not obliged to disclose their finances. The 20 deals Knop handled put $900 million in the pockets of 25 residents.

Typically they are like Howton and established small technology or service companies years ago, then were in high demand as the government began upgrading its computer systems, investing in new security technology and preparing for war after the Sept. 11 terrorist attacks.

Companies in D.C. received $52.5 billion in federal contracts in 2004, an increase of more than 55 percent compared with 2001 and the largest concentration of government work in the country, according to the Institute for Public Policy at George Mason University.

As their pipeline of business and staff expertise increased, companies such as Kathryn Freeland's RGII Technologies became attractive to bigger firms — in RGII Technologies' case, Computer Horizons, which paid Freeland more than $21 million in a takeover.

Jeanette Lee White, who did not take a salary for the first four years she ran Sytel, will split most of the $18.5 million profit from its sale with her ex-husband.

Roger Mody made about $125 million when his 15-year-old government contracting firm, Signal Corp., was sold for $227 million in 2002.

"For me, it was like hitting the lottery," Mody said.

The region's newest millionaires are unlike the high-tech set that made extraordinary (if sometimes fleeting) amounts of money in the late 1990s. Government contracting is markedly sober, as are the executives leading it. It is a sector of security clearances, patriotism and rules of discretion so stringent they sometimes prevent executives from knowing exactly what their employees are working on. Unlike the dot-com kings — who were in the gossip pages as much as in the business section — most government-contracting millionaires shun the limelight.

"The government market is a conservative market. ... The people I see are still driving the same car they were before," said Bob Lohfeld, a consultant who advises companies on mergers and acquisitions. "This wealth sort of sneaks up on people."

But while contracting millionaires aren't flashing their wealth around town, they're not letting it sit idle. The local economy already benefits greatly from government contracts, and the money paid to individuals in mergers is a sort of premium on top of that. The money is recycled into the local real estate and retail markets, enriches the lawyers and consultants who set up deals, benefits local charities, and frequently is used to start new businesses.

For Howton, it's a bigger payoff than he dreamed of a decade ago when he maxed out 10 credit cards, racking up $200,000 in debt to start Gray Hawk Systems.

Like many in the industry, Howton landed in government contracting by way of the military. Thirty years ago, when he was medically discharged as a Navy lieutenant, he went to work for Syscon for $24,000 a year, a good salary in those days, he said.

After stints with several larger firms, Howton decided to start his own company. In 1995, after a fallout with a partner who assumed control of his first startup, he founded Gray Hawk in his basement.

The company marketed itself as a catchall technology and engineering shop, but growth was slow. Howton landed an initial subcontract with old friends at Syscon, yet five years into its existence, Gray Hawk was pulling in just $5 million in annual revenue.

Gradually, the company developed an expertise in software that could analyze large amounts of raw data. After Sept. 11, as intelligence agencies looked for tools to improve their data-mining ability, demand for Gray Hawk's services rose significantly. By 2003, Howton's company was bringing in $58.3 million in annual revenue, and its work force topped 400 employees, 95 percent of whom had security clearances required to work on classified projects. Howton began getting weekly calls about a possible sale.

Last spring, Fairfax, Va.-based ManTech International bought Gray Hawk for $100 million in cash. At the time of the sale, Howton owned 51 percent of the company, he said.

While the Howtons lived well before the deal with ManTech, it put them on a different plane.

"When you get a lot of money all at once, you do have an issue with what to do with it," he said.

There were a few luxuries, like a new Lexus for Howton's wife and a summer vacation to Italy. Trusts were set up for Howton's young daughters and his three grown children from a previous marriage. He gave money to his old high school, to the USO and to orphanages in Central America, among gifts totaling about $200,000 last year.

He also spent $1 million to open a new government contracting company, KingFisher Systems, starting the cycle all over again.

But the family's life isn't all that different, the Howtons said.

"It's still car pools, piano lessons, gymnastics," said Barbara Howton.

Roger Mody, more culturally aligned with the dot-com set, sold Signal partly because "all of my net worth was tied up in the company." Since the deal closed, Mody has had the cash to buy real estate in Myrtle Beach, S.C., and partial ownership of a jet company and to invest in a few area startups. He also gave $200,000 to charities last year and is building a 30,000-square-foot home.

There have been no fancy cars or new houses for Freeland, the sole stockholder in RGII Technologies when it was sold for $21 million in cash plus $10 million more if the company performs well over the next few years.

Freeland, 43, is still with her company, now a subsidiary of a larger firm, and says she's "working harder than I did before."

She said the wealth hasn't changed her family's lifestyle, but it has allowed her to give $50,000 a year to minority students and establish a $250,000 endowment at the University of Maryland Baltimore County.

Her biggest concern is how the money could affect her twin 12-year-old daughters.

"They've been trained to say, 'Hey, we've been blessed,' " Freeland said. "We try to make sure that they stay humble themselves."

After Sytel was sold, White was inundated by calls from wealth advisers, offering to help manage her money. Financially, the sale of the 300-person company last year was a relief.

The money has allowed her to take some time off and to explore potential investments in real estate and health-care companies. Managing the money, she said, is a new favorite hobby.

Howton, meanwhile, also has plans to spend some of his millions in the coming year — but it won't be on expensive art or antique cars. "We'll probably pick up some other little companies as we go along," he said.