Computer Sciences Corp. is selling parts of Reston-based DynCorp it acquired last year, saying the units, which provide security to foreign leaders and train international police, do not fit with its information technology focus.
Veritas Capital of New York, a private equity group that has bought and sold defense contractors, agreed to pay CSC $775 million in cash and $75 million in preferred stock. CSC will keep DynCorp's information technology business, which links computer systems, builds communication networks and modifies software.
The units being sold, DynCorp International, DynMarine, and some DynCorp Technical Services contracts, had $1.6 billion in revenue in the year ended in October, CSC officials said. The units employ about 900 people in the Washington area. They provide primarily low-profit-margin services, and their contracts include protecting Afghan President Hamid Karzai and training Kuwaiti and Iraqi forces.
"It's critically important work and while it's a very successful business, it's not a business that we have synergy" with, said Paul M. Cofoni, president of CSC's federal business. "Even at the time of acquisition, many of our customers wondered why we would keep that business."
"They were sort of orphaned at CSC [with] not a lot of attention paid to them," said Robert B. McKeon, president of Veritas Capital. "CSC is really an IT company not interested in these types of businesses."
One of Veritas's previous investments, Vertex Aerospace, had government contracts to maintain planes and competed with DynCorp. Veritas sold Vertex this year and is comfortable with the market, McKeon said. "It has to be managed very carefully; a lot of controls and discipline have to be in place," he said.
Veritas bought the DynCorp units at a discount, something common among services companies, which earn smaller margins and face more competitors, industry analysts said. "The concern was that they would drag down CSC's margins," said Stuart McCutchan, editor of Defense Mergers & Acquisitions.
CSC of El Segundo, Calif., bought DynCorp in March 2003 for $950 million but had always questioned whether it would keep the non-IT parts, company officials said.
For CSC, the deal will likely mean slower growth in the short term. Operations supporting the military in the Middle East, many of them conducted under DynCorp contracts, are the fastest-growing part of CSC's business, the company has previously acknowledged.
The company, which reported revenue of $11.3 billion in fiscal 2003, said yesterday that it would take a $400 million gain related to the deal. The transaction strengthens the company's financial position and gives the firm more financial flexibility, Van B. Honeycutt, CSC'S chairman and chief executive, said in a statement.
"This transaction will allow us to continue concentrating on our core competency of providing information technology, engineering and professional services," Honeycutt said.
The deal, which still needs regulatory approval, is expected to close in April.
CSC stock closed yesterday at $57.25, up 2.7 percent.