IT services giant Computer Sciences Corp plans to leapfrog rival Accenture Ltd into becoming the world’s fifth largest IT services firm following the acquisition of US government sector services firm DynCorp Inc.
Under the terms of the deal, El Segundo, California-based CSC will pay $950m in cash and shares to acquire privately held DynCorp as well as take on its debts, which stood at $273m on September 26. Under the deal, each DynCorp share will be converted into $15 in cash as well as $43 in value of CSC shares.
Reston, Virginia-based DynCorp ranks as the 22nd largest IT services firm worldwide based on Global Computing Services rankings, ahead of IT and business process outsourcing (BPO) provider ACS Inc. The company will provide CSC with an additional $2.3bn in annual revenue based on its full year to September 26, and more than 23,000 staff at over 55 locations worldwide.
Together, CSC and DynCorp will create a firm with combined annual revenue of $13.7bn, enabling CSC to leapfrog consulting and outsourcing rival Accenture Ltd in size, where it will sit behind Hewlett-Packard, Fujitsu, EDS and IBM GS as the world’s fifth largest IT services firm.
CSC said DynCorp would be pooled into its existing Federal Sector division, which currently employs 15,000 people and is headquartered in Falls Church, Virginia. And following the acquisition, the division will more than double in size, generating around $6bn in annual revenue with 38,000 staff, or around 44% of the company’s combined total revenue.
Van Honeycutt, CEO for CSC said on a conference call to announce the deal: DynCorp generates 98% of its revenue from the US federal government, and the combination of the two companies will improve our ability for providing services to the new homeland security department. He also said CSC would increase its scope in key accounts including the Department of State, Energy and Justice, and would generate an order pipeline by 2005 in the government sector of $40bn.
Paul Lombardi, CEO of DynCorp said: There is a massive amount of consolidation in the industry, and there is more than ever before a need for a diverse set of competencies… Only large multifaceted companies with the full range of mission oriented and system integration skills will be successful… We are privately held and debt financed and could not be the consolidator in these market conditions.
For CSC the DynCorp purchase will enable it to steal a larger share of the lucrative US government sector services market from rivals such as SAIC, EDS and IBM Global Services. The US government’s General Services Administration Millenia project has a budget of $25bn to invest in federal government IT services projects over an indefinite time period. And DynCorp will provide CSC with additional skills in systems and network integration, logistics and maintenance services, infrastructure management and security services to clients including the US Air Force, US Army, US Navy, Department of Defense, Department of Justice, IRS, FBI, USPS, United Nations, Department of Treasury and US Marshals.
DynCorp experienced strong revenue growth in 2002. During its most recent announced quarter ended June 30, the company grew sales 24.8% to $595m although it turned in a net loss of $2m compared to a net profit of $4.8m in 2001. In comparison, CSC turned in sales of $2.7bn for its most recent quarter ending September 27, a 1.2% slip on last year, although net income was up 36.2% to $92.9m.
CSC and DynCorp already provide IT services to some of the same clients, and through the purchase CSC will be looking to further exploit the potential here for further business. In September DynCorp signed a $850m managed services project with the Information Technology Solutions, Environmental Protection Agency (ITS-EPA). The deal involves DynCorp providing systems integration and network services for the agency over its seven-year duration, alongside subcontractors including IBM Global Services, which provides the server, email, web and application hosting, as well as PlanetGov, Veridian, KPMG and a number of universities in the area. In April 2002, CSC won a smaller $285m project with the EPA to install a central data exchange system, and through the merger CSC will be getting its hands on a combined project worth well over $1bn.
This is the second largest acquisition to date by CSC, which has snapped up more than 65 companies in the last 15 years. Its largest deal was in 1996 when the $1.5bn purchase of Continuum Company ($500m revenue, 4,200 employees), which provided systems processing and software integration for the consulting sector.
The CSC and DynCorp tie-up is just the latest example of merger activity in the rapidly consolidating IT services market. Already in 2002, IBM GS has snapped up PwC Consulting for $3.4bn and Logica has merged with CMG, and in 2003 the M&A stakes are set to get even higher, as regional outfits and ailing publicly listed players merge to compete on breadth and depth of technological skills with their larger counterparts.
CSC said the acquisition will be accretive to earnings during fiscal 2004 prior to restructuring charges, which Honeycutt expects to cost no more than $40m.