El Segundo, California-based CSC will sell its DynCorp International and DynMarine units and certain DynCorp Technical Services contracts to private equity firm Veritas Capital for $850 million, of which $775 million will be in cash and $75 million will be in stock.

The US federal sector is CSC’s largest vertical market, where it is claimed to be the third largest IT services provider behind largest player Lockheed Martin and second place provider EDS Corp. Chairman and CEO Van B Honeycutt said the divestment is part of the company’s strategy to continue to concentrate on its core competency of providing information technology, engineering, or professional services to the sector.

When CSC acquired DynCorp in December 2002, the units being sold employed 14,000 people, or 39% of DynCorp’s total headcount, and represented 37% of its $2.52 billion annual revenue. However, Honeycutt said that for the 12 months ended October 1, 2004, revenue from the divested businesses made $1.6 billion or 25% of CSC’s US federal government business. CSC said the units represent 23% of its current US federal government pipeline of opportunities.

In full year 2003, CSC grew its federal government business sharply on the back of the DynCorp purchase. Revenue within the division rose 84.9% to $6.19 billion in the 12 months ended April 2, 2004, accounting for 41% of CSC’s total revenue. The growth was almost totally as a result of the DynCorp purchase, which accounted for 82.6% of the growth. CSC said in its full-year report that it had identified $24 billion of federal opportunities that will be awarded in fiscal 2005, plus an additional $12 billion over the following 23 months.

CSC completed its acquisition of DynCorp in March 2003, paying $914 million in cash and shares as well as taking on DynCorp’s debts, which stood at $273 million on September 26, 2002. Together, CSC and DynCorp created a company with combined annual revenue of $13.7 billion, enabling CSC to leapfrog consulting and outsourcing rival Accenture Ltd in size, to sit behind Hewlett-Packard, Fujitsu, EDS, and IBM GS as the world’s fifth largest IT services firm.

DynCorp was pooled into CSC’s existing Federal Sector division, which already employed 15,000 people. The acquisition more than doubled the size of the division, generating combined annual revenue of $6 billion with 38,000 staff, about 44% of CSC’s combined total revenue at the time.

Following the sale, CSC said it expects to record a non-recurring gain before income tax of $400 million, and said it may use the $775 million in cash proceeds to reduce debt, repurchase CSC common shares, fund acquisitions, or other general corporate purposes. CSC’s cash and cash equivalents stood at $546.3 million at the start of October 2004, down from $609.7 million at the start of April 2004.

The sale is due for completion by the end of the first quarter ending April 1, 2005, and CSC said it does not expect the sale to alter its projections for fiscal 2005 earnings of between $3.10 and $3.20 per share.

New York-based Veritas Capital has existing federal government sector IT services investments including McNeil Technologies, Vertex Aerospace, Sierra Research, Zeta, Excalibur, Metric Systems, and Signia Integrated Defense Technologies.