L-3 Communications Holdings Inc., the largest supplier of U.S. Army translators, lost the $4.6 billion contract to provide linguists in Iraq to a group led by DynCorp International Inc.
The stock fell 5.6 percent Monday after L-3 said the loss of the order, the New York-based company's largest contract, will cut sales and profit next year. DynCorp had its biggest gain since the company's initial stock sale in May.
L-3 had been the favorite to win the five-year contract, covering linguists who help soldiers in Iraq talk to residents. The company picked up the order in its $1.97 billion purchase of Titan Corp. last year, and the loss marks a setback for new Chief Executive Officer Michael Strianese, who took over after co-founder Frank Lanza died in June.
"The odds-on favorite to win this competition was L-3, so this outcome is a bit of David and Goliath," said Myles Walton, a Boston-based analyst with CIBC World Markets. "This wipes away any chance of 2007 being a good organic growth year for L-3. It's challenging to recover from a $500 million drop in revenue."
Walton rates L-3 "sector perform" and DynCorp "sector outperform" and doesn't hold shares of either. CIBC has done investment banking work for DynCorp this year.
Shares of L-3 fell $4.72 to close at $79 on the New York Stock Exchange, their largest drop since May 31. The stock has risen 6.3 percent this year.
DynCorp based its bid on its experience in Iraq training police and helping protect U.S. embassies, said DynCorp spokesman Gregory Lagana. Those contracts have a language-services component. DynCorp, based in Falls Church, Va., gained $2.14, or 15 percent, to $16.05.
Demand for language services soared during the Iraq and Afghanistan wars. Translation work generated $295 million in revenue for L-3 in the first half of this year, or almost 5 percent of its total of $6 billion. L-3 also makes battlefield communications systems and explosives detectors.
Communications Systems-West, the Salt Lake division of L-3, employs 2,300 people in Utah.
L-3, whose old forecasts had assumed the company would win the re-competition for the linguist contract, cut its 2007 sales forecast by $500 million, to $12.9 billion to $13.1 billion. It lowered the earnings estimate by 15 cents, to $5.45 to $5.55.
Sales growth already had been forecast to slow next year from the 37 percent increase in 2005. L-3 said it "remains well positioned for profitable growth in 2007 and beyond."
L-3 had made a joint bid for the business with Northrop Grumman Corp., the Army's second-biggest translator. The Army's two-page statement on the award provided no explanation of why L- 3 lost the work, and Army spokesman James Barham declined to provide additional information.
The company may protest the award, Credit Suisse analyst Robert Spingarn said in a note. Spingarn cut his rating on the shares to "neutral" and lowered the 2007 sales and earnings forecasts by $410 million and 13 cents a share, respectively.
The winning team is called Global Linguist Solutions LLC, a joint venture held 51 percent by DynCorp and 49 percent by McNeil Technologies, Lagana said. Both companies are controlled by Veritas Capital, the second-largest private equity firm targeting U.S. defense contracts.
"We had a strong proposal and we have a good track record in Iraq," Lagana said in a phone interview Monday.
New York-based Veritas was founded in 1992 by Robert McKeon, the former chairman of Wasserstein Perella Management Partners. Veritas-owned companies had $493.8 million in Pentagon sales last year, second among private-equity firms to Carlyle Group's $1.78 billion, according to the department's Web site.
DynCorp's team will employ 6,000 locally hired translators and as many as 1,000 U.S. citizens with security clearances who are native speakers of languages spoken in Iraq, the company said in a statement. The five-year contract begins in March.
That will be almost triple the 2,500 employees DynCorp currently has in Iraq, the company said.