DynCorp to Buy Alexandria Firm as It Seeks Wider Government Work

By Dana Hedgpeth
Washington Post Staff Writer
Tuesday, September 29, 2009

DynCorp International, a Falls Church-based government contractor, said Monday that it will buy Phoenix Consulting Group, a privately held Alexandria firm that provides training and technical support to intelligence and special operations units.

The terms of the transaction were not disclosed, but industry analysts estimated a purchase price of $30 million to $50 million.

DynCorp specializes in providing security, police training and logistical support for the military and civilian agencies in places such as Iraq and Afghanistan. Like other contractors, DynCorp has benefited from the government's reliance on private-sector companies to support military operations overseas during the past several years. But with the wars expected to wind down, DynCorp, which expects roughly $3 billion in sales this year, is looking to diversify by expanding into other government services, analysts said.

"This is the first [merger and acquisition] transaction they've had where they're getting away from direct aid to the conflicts in Iraq and Afghanistan," said Erik Olbeter, a senior analyst with Pacific Crest. "Their short-term prospects for business look good, but investors are worried in the long term, post Iraq and Afghanistan, that the company may not have enough revenue streams to justify the stock price."

By acquiring Phoenix, DynCorp moves deeper into intelligence and special operations work, analysts said. Many of Phoenix's 400 employees have top-secret security clearances and perform a range of government work, from technical services to highly specialized training courses for military personnel.

"This acquisition is consistent with our goal of accelerating growth, expanding service offerings and penetrating new segments," William L. Ballhaus, chief executive of DynCorp, said in a statement.

The deal is expected to close in October. Shares of DynCorp gained 51 cents, or 2.9 percent, to close at $18.01.

Joseph Vafi, an analyst at Jefferies & Co., said the deal could help DynCorp add to its customer base.

"A lot of the work DynCorp does is in training for the State Department," Vafi said. "This looks like it expands them into other three-letter agencies in the government," referring to the FBI, National Security Agency and CIA.

Vafi said DynCorp was highly leveraged with debt after it was spun off from CSC Corp. in 2005, limiting its ability to do many acquisitions.

"This is a sign that they're moving beyond their leveraged buyout and going out and buying up acquisitions like CACI and Mantech have done," Vafi said, referring to two other Washington area government contractors that have grown significantly in recently years.

DynCorp has faced criticism for some of its overseas work for the military. This summer, Pentagon auditors said the company overbilled the government by $50 million on its contract to provide dining facilities and living quarters for military personnel in Kuwait. DynCorp also drew the attention of the State Department's inspector general after incidents of questionable management oversight in a case in Afghanistan where expatriate DynCorp employees hired a teenage boy to perform a tribal dance at a company farewell party and videotaped the event.

The company defended itself in the contract pricing disputes, saying the billing problems were the result of changes the government made to the deal, which added costs. DynCorp also said it strengthened its ethics practices in part because of the State Department auditor's inquiry.

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