Spy market

The burgeoning market of U.S. intelligence agencies has become a bit more interesting. A series of recent deals, including a high-profile acquisition and a significant new agreement with the CIA for one Silicon Valley startup, show some companies are betting big on selling to U.S. spies.

The CIA's venture capital group, In-Q-Tel, which invests in promising new technology companies, signed its first-ever licensing extension last month with Tacit, a collaborative technology maker in Palo Alto, Calif. In-Q-Tel signed its first deal with Tacit just last summer.

In-Q-Tel Chief Executive Officer Gilman Louie, whose blessing for some companies carries the glitz and prestige of an actor being signed by a major Hollywood talent agency, said in a statement that Tacit's product held "undeniable value to a wide range of government contractors."

Louie ought to know. In-Q-Tel invests in companies whose technologies fit a CIA-crafted "problem set." What has the agency so batty for Tacit? The company's data- sharing software allows people within a law enforcement or intelligence agency to search their organization's databases for potentially valuable reports, and also to send e-mail messages to their colleagues asking for assistance.

But the product also has a patented secrecy feature that lets employees choose whether they want to respond to those queries, which would reveal their identity and, potentially, their sources of information. The CIA, with a culture of secrecy so strong that even colleagues sometimes refrain from discussing their work with one another, clearly sees something in that particular feature that fits its problem set quite nicely.

Major League

At the opposite end of the market from the boutique technology firms, a relative intelligence outsider, American Management Systems Inc., is making a play to compete with legendary behemoths such as Lockheed-Martin and SAIC, which for years have dominated the shadowy world of multimillion dollar technology services contracts in the intelligence market.

With its acquisition last week of systems integrator R.M. Vredenburg & Co., business and consulting firm AMS has taken its first significant step into that big league. AMS paid about $42 million in cash for Vredenburg, and in the process rounded out its intelligence customer base. Heretofore, AMS had some contracts with about three- quarters of the 13 agencies that comprise the "intelligence community." Vredenburg had contracts with the remaining agencies. The acquisition also will add $60 million to AMS' annual revenues, the company estimates.

John Hillen, a former staff member of the congressionally appointed Commission on National Security who now heads AMS' defense and intelligence unit, says the focus of national security hasn't fundamentally changed in the past half century, having been fixated on preventing the expansion of the Soviet Union. Now, with the amorphous threat of terrorism the primary focus, companies like AMS are clamoring to "transform" the CIA and its cohorts out of their Cold War mindsets.

Hillen, who was a Defense policy adviser to the Bush 2000 campaign, says that the purchase of Vredenburg, coupled with the $100 million of intelligence contracts AMS scored in the first five months of this fiscal year, have taken the company "from single-A to triple-A ball."

But how does AMS plan to play in the majors? "That jump is the hardest," Hillen confesses. With most intelligence budget dollars going for multibillion dollar space satellites, AMS can't hope to beat the Lockheed and Boeings of the world at their own game. Instead, Hillen is zeroing in on what he sees as the "dramatic new ways" intelligence is being gathered, processed and analyzed.

To exploit that market, AMS will have to look to the niche start-ups like Tacit and others that are finding the field of intelligence more profitable than ever.

Four-year-old Artesia Technologies of Rockville, Md., for instance, has seen its federal business grow markedly in the past six months, with 30 percent of the last financial quarter's sales coming from government contracts, said Scott Bowen, the company's founder and president. Artesia earned 17 percent of its total revenue from Uncle Sam last fiscal year, he said.

Artesia makes searching technology that can scan video, audio and other digital content for key words and images. Analysts at the Defense Intelligence Agency use the product to scour a wide array of content, including news broadcasts from around the world and video shot by unmanned Predator drones flying over battlefields.

AMS still has a way to go making its name as a big-time intelligence contractor, if the executives at Artesia are any barometers. Asked whom they saw as the main players in the market, the names Lockheed-Martin, Northrop Grumman and SAIC sprang to mind. AMS didn't.