Computer Sciences Acquires DynCorp

By Erin Joyce

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Information technology consultancy Computer Sciences Corporation is creating a bigger footprint in the government sector with its $950 million purchase of IT firm DynCorp.

The merger, which includes CSC's assumption of all of DynCorp's $273 million debt, would rank CSC as a top 10 government contractor, the companies said.

Once it closes after customary federal and shareholder review, the El Sequndo, Calif.-based CSC will have much stronger footing to compete with major IT services firms such as IBM and EDS as they line up for new federal dollars earmarked for homeland security initiatives.

CSC Chairman and Chief Executive Officer Van B. Honeycutt said the deal is part of the company's plan to grow internally and by acquisition.

"With this transaction, we are seizing an opportunity to significantly strengthen our leadership position in the U.S. federal marketplace, augment our capabilities to support the requirements of the new Homeland Security Department and respond to the federal government's initiative to increase its reliance on service providers."

The companies said the combined skills of their staffs blend well, and would enable the merged company to expand its products and offers to both civil agencies and the various departments within the Department of Defense.

Founded in 1946, the Reston, Virginia-based DynCorp counts more than 40 federal agencies as clients, including departments of Defense, State, Agriculture, Energy and Justice, the Centers for Disease Control and the Defense Information Systems Agency. Its services contracts cover network integration, high-tech range operations, global defense logistics, maintenance services and contingency support.

But its work on homeland security services and infrastructure management of critical defense assets are key practices that CSC needs, as the federal government gears up for IT spending for the creation of the new cabinet level Department of Homeland Security.

Input, a Virginia firm that specializes in IT market research, estimates that the $37 billion budget to create the Department of Homeland Defense, which includes merging 22 different government agencies, has earmarked some $2.1 billion for IT contracts.

The Government Electronics and Information Technology Association, an interest group, estimates that the federal government overall will spend more than $74 billion on information technology in fiscal 2003.

With more than 23,000 staff in over 550 positions in the world, and fiscal 2002 revenues of $2.3 billion, DynCorp is among the largest employee-owned information technology and outsourcing firms headquartered in the U.S.

CSC has similar roots. Two computer analysts who had worked with federal agencies via the aerospace industry launched the company in 1959. One of the founders, an IBM alum, helped develop the FORTRAN computing language.

CSC's fiscal second quarter revenues alone were $2.7 billion. Although down slightly from the same year-ago period, CSC's U.S. federal government activities helped keep the gap from widening.

The companies said DynCorp would become part of CSC's Federal Sector unit, which currently counts about 15,000 employees and is headquartered in Falls Church, Va.

The combined organizations are expected to bring greater scale to CSC's presence in the U.S. federal marketplace. CSC said when the purchase closes, the merged company is expected to take in about $6 billion a year in revenue from the federal government (based upon estimated fiscal 2003 year-end revenues). In all, it would count nearly 38,000 staff working on U.S. government contracts around the globe.

"The combination provides our customers with broader resources and an even higher level of quality services, while enhancing and broadening professional opportunities for our employees," said DynCorp President and Chief Executive Officer Paul Lombardi.

After the deal closes, each DynCorp share is to be converted into $15 in cash and $43 in market value of CSC shares.