DynCorp Ends Public Experiment

DynCorp agrees to a $1.5 billion take-private, ending its brief but controversial run as a publicy traded company.
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FALLS CHURCH, Va. (TheStreet) -- DynCorp International's (DCP) - Get Report 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) - Get Report

and

KBR

(KBR) - Get Report

-- rather than the more martial offerings of DynCorp.

One group has made out well over the last half decade: Veritas, of course, which will receive about $350 million for its 35% of DynCorp common stock, if the deal goes through. The buyout agreement contains a go-shop provision, which allows DynCorp to seek a competing bid for the next 28 days.

At least three law firms issued press releases Monday announcing investigations into the deal, apparently in preparation for class-action shareholder suits.

For its part, Cerberus, which has been licking its wounds ever since its buyout of

Chrysler

ended in catastrophe, will use financing from a slew of bulge bracket firms -- Bank of America Merrill Lynch, Citigroup, Barclays and Deutsche Bank -- another indication that capital markets for private-equity sponsors continue to unfreeze.

DynCorp shares ended trading Monday at $17.41, up $5.66, or 48%. Volume reached 37.4 million shares, more than 70 times the daily average turnover in the name.

-- Written by Scott Eden in New York

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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.