Computer Sciences Corp. on Friday announced plans to acquire DynCorp in a $677-million deal aimed at expanding its ability to benefit from the federal government's fight against terrorism.
In acquiring DynCorp, a private company that provides information and security systems to government agencies, El Segundo-based CSC would add $2.3 billion to its annual revenue, for a total of $13.7 billion. Government contracting would make up 40% of that total, up from about 30% now.
The deal comes as the federal government increases technology spending to support the fledgling Department of Homeland Security.
"With this transaction, we are seizing an opportunity to significantly strengthen our leadership position in the U.S. federal marketplace," said CSC Chairman and Chief Executive Van B. Honeycutt.
The deal calls for CSC to pay $15 in cash and $43 in stock for each share of Reston, Va.-based DynCorp and to assume about $273 million in debt.
CSC shares fell $1.76 to $32.91 on the New York Stock Exchange.
CSC said it expects the transaction, subject to approval by shareholders and regulators, to be completed in the first quarter of 2003.
The company said the acquisition would contribute to its earnings for the fiscal year ending March 2004, excluding the effect of a special charge related to the transaction.
Stephen McClellan, an analyst with Merrill Lynch Global Securities, said the acquisition would give CSC a solid presence in security and anti-terrorism work. CSC specializes in information technology services and consulting.
"I think they got a good chunk of federal business for a cheap price, and it's a healthy market these days," compared with a stagnant market in the private sector, McClellan said.
The acquisition adds the State, Justice and Energy departments to CSC's roster of clients and expands its presence abroad.
Still, McClellan said, government security contracting may prove a tough business in the long run because profit margins tend to be lower than in the commercial sector.
In the end, the DynCorp purchase is "a plus, but not a big plus," McClellan said.
CSC plans to combine DynCorp's operations with its Federal Sector unit, which is based in Falls Church, Va., and employs about 15,000 people. Honeycutt said an unspecified number of jobs would be cut after the acquisition. The two companies employ about 88,000 people.
"It looks reasonable, but Mr. Honeycutt should have a detailed plan to integrate the companies quickly," portfolio manager Matt Kaufler told Bloomberg News. He helps direct about $1.7 billion at Clover Capital Management, which owns 215,000 Computer Sciences shares. "They should be able to wring some cost efficiency out of it."
Paul V. Lombardi, president and chief executive of DynCorp, said his company began looking for a merger partner because of consolidation in the defense industry and the difficulty in competing for government contracts that require more comprehensive packages of services.
"It's a high-stakes game, and being a private company, we got the point that even though we're very large, we couldn't grow," Lombardi said. "We didn't have the market cap to do it."
DynCorp's work for the State Department includes the installation and maintenance of physical security systems at U.S. embassies.
DynCorp also runs the federal government's emergency telephone system, which it is converting from a land-line to a wireless system. It handles the administration of a pecking order that allows higher-level officials to access phone lines when circuits are busy for others.
DynCorp was founded in 1946 as an aircraft maintenance company and shifted the bulk of its business to government contracting about 10 years ago. The company maintains all of the White House's aircraft except Air Force One.
A combined CSC-DynCorp, Lombardi said, would create the kind of heft needed to compete for contracts as the White House moves toward outsourcing more government work.