Reston-based DynCorp, founded by World War II pilots who built a $2 billion firm that provides services from upgrading government computers to protecting foreign presidents, agreed to be acquired yesterday by a larger California computer services company, part of a consolidation trend among government technology contractors.
Computer Sciences Corp. plans to buy employee-owned DynCorp for $677 million in cash and stock, creating an industry behemoth positioned to pounce on the expected increase in federal spending for homeland security.
The combined government practice would have $6 billion in revenue and 38,000 employees, 12,500 of them in the Washington area. It would also push CSC into the ranks of Lockheed Martin Corp. and Northrop Grumman Corp. as one of the largest providers of technology services to the government.
"We see a massive amount of consolidation in the industry. Government contract offerings are being bundled into large, multi-year solicitations that require an increasingly diverse set of competencies than have ever been required in the past," Paul V. Lombardi, DynCorp's president and chief executive, said in a conference call with analysts. "We simply could not be a consolidator to the extent required to match the trends."
Paul Cofoni, president of CSC's federal sector unit, said that for CSC, the acquisition of DynCorp "positions us firmly in the homeland security market."
The proposed merger, which requires the approval of shareholders and antitrust regulators, could turn into a big payday for DynCorp's employees, who own 84 percent of the company's shares. Under the deal, which could close early next year, each DynCorp share would be worth $15 in cash and $43 in CSC shares. CSC would also assume $273 million of DynCorp's debt.
It could also be a big payday for DynCorp's executives and directors, who own more than 9 percent of the company. Dan R. Bannister, chairman of the board, owns 4.1 percent of the company's shares, worth about $29 million, according to a June Securities and Exchange Commission filing. Lombardi owns 2 percent, worth about $12.5 million; and Herbert S. Winokur, a board member since 1998, owns 3.7 percent, worth about $25 million.
This summer, DynCorp's employees were able to buy shares for $51.25 each, meaning they will earn a 12 percent profit if the acquisition is approved. That could come to even more for longtime employees who have been accumulating shares since a management buyout took the company private in 1987.
Not all employees were rejoicing.
"We weren't really that happy about it," said one employee, who asked that his name not be used. DynCorp could have continued to grow independently, and its current structure would have been more profitable for employees than to have shares in a publicly traded firm, said the employee, who is also concerned about his position being eliminated as part of the acquisition.
CSC does plan some layoffs and office consolidations, company officials said yesterday, but they didn't provide details. DynCorp considered going public, but Wall Street looked too risky, Lombardi said. Since the Sept. 11, 2001, terrorist attacks and the economic downturn, six government contractors have gone public at high valuations. DynCorp could have joined them, Lombardi said, but if investors abandoned the market when the rest of the economy rebounded, DynCorp's employees could have lost their retirement savings.
DynCorp couldn't remain independent given the growth of the market, Lombardi said. Federal agencies are awarding increasingly larger contracts that require larger companies to fulfill them. To compete, DynCorp would have had to grow through acquisitions. That would have required taking on more debt, and with $273 million in debt already on the books, that was not feasible, he said.
"Look around, you're either a consolidator or you're being consolidated," Lombardi said. "I just felt that we could get a better bargain with a strategic acquisition."
DynCorp was founded in 1946 as California Eastern Airways Inc. It was among the first firms to ship cargo by air before diversifying into government contracting and, in the early 1990s, into information technology.
During the last decade, DynCorp has settled into a position as one of the largest government contractors in the region. Fifty-five percent of its revenue comes from providing information technology services; it also maintains aircraft, supports marine-based petroleum services and manages medical systems. On a single military base, a DynCorp employee may be found mowing the lawn, repairing a roof or installing a computer network. It is upgrading the FBI's computer system, and a subsidiary has a Department of Defense contract to develop an anthrax vaccine.
DynCorp also entered the secretive world of private security. In November, it began providing security to Afghan President Hamid Karzai under a contract with the U. S. State Department. In the early 1990s, it guarded Haitian President Jean-Bertrand Aristide. But DynCorp employees working in Bosnia have been accused of consorting with underage girls and patronizing brothels.
CSC, by contrast, focuses on information technology services for the commercial sector.
"It's probably an okay deal for CSC," but a large segment of DynCorp's business is low margin, said Gregory E. Gieber, an analyst with A.G. Edwards & Sons Inc. CSC may need to divest some of DynCorp's business units, he said. "Airplane maintenance -- how's that synergistic with CSC?"
The companies are complementary in several ways, DynCorp and CSC officials said. DynCorp's physical security capabilities and CSC's cyber-security abilities could be offered as a package, CSC's Cofoni said. CSC does some work with the State Department, but the department is a major client of DynCorp's.
The deal would expand CSC's government business from 27 percent of revenue to more than 40 percent. That would help offset losses in CSC's private-sector business, where revenue in the quarter that ended in September declined 8 percent, to $959 million, from more than $1 billion during the year-earlier period. In August, the firm asked 66,000 employees to volunteer to take extended leaves of absence -- for at least six months -- at 20 percent of their pay.
CSC expects the deal to add to its profit starting in 2004. Given the decline in the commercial sector, the move is not surprising, analysts said.
"You go to where the money is, and that's what they're doing," Gieber said.
Staff writer Yuki Noguchi and researcher Richard Drezen contributed to this report.