DynCorp Vaults the Value Chain

By Nick Wakeman, Staff WriterDynCorp's pending acquisition of GTE Information Systems LLC positions the company to tackle more high-end telecommunications and network outsourcing projects in the government market.DynCorp President and Chief Executive Paul Lombardi said he already has identified nine such projects worth more than $100 million apiece that the combined company can pursue. Neither DynCorp nor the GTE unit could have bid them alone, he said.With the acquisition, Reston, Va.-based DynCorp will hit $1.7 billion in 2000, with more than half of that coming from information technology and telecommunications work. The deal, which was announced Nov. 4, should close by early December, DynCorp officials said.While the purchase price has not been disclosed, DynCorp will pick up $235 million in revenue and 925 people by acquiring the Chantilly, Va.-based unit of GTE. Currently, DynCorp has just under $1.4 billion in revenue and 16,000 employees.To buy GTE, DynCorp had to beat out several other billion-dollar players. Among them, sources said, were ITT Corp., Litton Industries Inc., L3 Communications Inc., Northrop Grumman Corp., and Getronics NV, which owns Wang Global.Lombardi said DynCorp has had its eyes on GTE since the Irving, Texas, company announced the sale in January of its four government information technology units. General Dynamics Corp., Falls Church, Va., walked away with three of those units in a $1 billion deal that closed in September.DynCorp officials saw "a high-end integration capability which supplements what we have, especially in the network management and network integration area," Lombardi said.The DynCorp-GTE deal, and the announcement by Keane Inc. of Boston Nov. 10 that it intends to buy Anstec Inc. of McLean, Va., shows that consolidation forces continue to reshape the government market. No price tag has been put on that deal.DynCorp, which has fallen short on acquisition attempts in recent years, snagged GTE when many of its competitors were busy digesting other deals. Indeed, recent deals by some of the industry's more aggressive acquirers include Computer Sciences Corp.'s $390 million deal for Nichols Research Corp., Science Applications International Corp.'s $150 million acquisition of Boeing Information Systems and Veridian Inc.'s three deals. The GTE acquisition brings new technologies and contracts to DynCorp in growing markets such as wireless and satellite communications and electronic business, analysts and company officials said. Major contracts the unit holds include the seven-year, $500 million Justice Consolidated Office Network contract GTE won in 1996, and several Defense Information Systems Agency contracts. The GTE unit also built a wireless network for the New York Stock Exchange."Combined, the company will be the No. 1 information systems and network management provider for the Justice Department," Lombardi said."Clearly, this is a major acquisition that brings DynCorp into some important technologies," said Richard Knop, a partner at the investment banking firm, Boles Knop & Co. of Middleburg, Va. Boles Knop served as an adviser to DynCorp on the deal.The GTE unit should be easy to integrate because the two companies rarely competed against each other, so there is little overlap, Lombardi said. "Although we touch the same customer base, we really don't do the same kinds of things," he said. "But when you think about the power of the whole package, we saw a tremendous advantage.""This is a good fit for DynCorp," said an executive with a large government integrator. The acquisition positions DynCorp to go after more large outsourcing work, the executive said.The acquisition also fits well with DynCorp's business of facilities operations and aviation and aerospace services, which accounts for about $700 million of DynCorp's revenue, said Jerry Grossman, director at investment banking firm Houlihan Lokey Howard & Zukin in McLean, Va."They have the enterprise management skills and the technology to be well-positioned for some of these large outsourcing contracts," Grossman said.Lombardi said his company can better compete with the likes of Andersen Consulting of Chicago, CSC, Electronic Data Systems Corp. of Plano, Texas, Litton-PRC Inc. of McLean, Va., Lockheed Martin Corp. of Bethesda, Md., and SAIC."There are only a few companies the size of DynCorp that can tackle some of these large projects," he said.GTE also brings a contract base that is about 60 percent firm fixed price and time and materials. "That is important because it will help generate more profitability" with time, Lombardi said. About 40 percent of DynCorp's contracts are firm-fixed price and time and materials. Under this type of contract, companies are paid a set rate for delivering a service regardless of actual contractor costs. As a contractor becomes more efficient, costs go down and profits go up, Grossman said.Under the traditional cost-plus contract, the company charges the government its cost of operations plus a set percentage, so no matter how efficient a contractor is, the profit margin stays the same, Grossman said."There is more risk, but if you manage firm-fixed price contracts well, you can earn better margins than the typical federal contractor," said John Allen, vice president of the investment banking firm Quarterdeck Investment Partners of Los Angeles.The acquisition also moves DynCorp closer to a run at the public markets. Going public is the "next logical step" for the company, Lombardi said.But at least one analyst, Thomas Meagher, vice president of research at BB&T Scott & Stringfellow in Vienna, Va., thinks the company should unload its non-IT business before going public because pure IT companies get a better valuation on Wall Street.Lombardi, however, said the growth of large outsourcing projects by the government were reason enough to keep the current business mix.But before making that run at the public markets, the company should get a quarter or two of combined operations under its belt and "have some demonstrated successes," Grossman said.Lombardi would not speculate on when DynCorp will go public, but did say that the company must be ready, "whether that is in the first quarter, second quarter or third quarter next year." XXXSPLITXXX-