DynCorp Ends Public Experiment

FALLS CHURCH, Va. (TheStreet) -- DynCorp International's(DCP) agreement to sell itself to Cerberus, the private-equity firm, for $1.5 billion, ends an uneven and ultimately unsuccessful experiment in operating a controversial government security-services contractor as a publicly traded entity.

As the arbs poured in during Monday's frantic regular session and drove DynCorp shares toward the offer price -- at $17.55 in cash, it was a 49% premium over the stock's closing price Friday -- company executives, and its biggest shareholder, Veritas Capital, must have been congratulating themselves inside their Beltway corporate compound.

Veritas, another big private-equity shop, bought DynCorp for $937 million five years ago and then took it public in May 2006 in the midst of a boom in LBOs and public-market exits. The shares priced at $15 (and Veritas paid itself a quick post-IPO dividend of $100 million).

But despite decent growth for DynCorp during those years -- its revenue rose nearly 50% between 2007 and 2009 -- the stock hasn't done much since it reached its all-time high near $27 back in late 2007.

"In my opinion, DynCorp has always been a tough public stock," says Joseph Vafi, a stock analyst covering defense contractors at Jeffries & Co. "A lot of what they do carries a lot of headline risk with it."

That's one way of putting it. Perhaps DynCorp's most contentions business is training security forces in Iraq and Afghanistan and providing protection to U.S. diplomats and other VIPs traveling through war zones and other dangerous regions. Indeed, the company has essentially two clients: the Department of Defense and the Department of State.

The company's work in Iraq and Afghanistan has drawn criticism not only about the effectiveness of those services, but whether they have led to the deaths of civilians and DynCorp employees alike. Most recently, the deaths of two DynCorp contractors in Afghanistan have sparked a scandal, as they appear to have been drug related.

Now, however, DynCorp can operate without the need to file pesky regulatory filings, along with fellow private security contractor, Xe Services, formerly known as Blackwater. Several DynCorp rivals remain public, but those concerns are much larger and focus more on construction and engineering services -- such as Fluor(FLR) and KBR(KBR) -- rather than the more martial offerings of DynCorp.