SAIC ready to go public

Employee-owned firm plans 2006 stock issue

SAIC IPO Information

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Science Applications International Corp.'s history and management rigor will ease its transition from an employee-owned firm to a public company, according to industry observers who have watched the longtime contractor operate in the federal market.

SAIC plans to emerge as a publicly traded company early next year. On Sept. 1, officials filed the necessary paperwork with the Securities and Exchange Commission to clear the way for an initial public offering (IPO).

SAIC plans to raise as much as $1.7 billion through the IPO, according to its registration statement. The company has yet to disclose the number of shares to be offered and their price.

"We need a change in our capital structure," said Ken Dahlberg, SAIC's president and chief executive officer, in a video address. He said the proceeds of the offering will enable the company to pay a special dividend to current shareholders, fund growth and provide the means to pursue acquisitions.

Raising capital from the public market will also ease internal demands for cash, Dahlberg said. SAIC has spent $2.5 billion in recent years to repurchase shares from private shareholders.

"We should be using our cash on hand and cash flows from operations to fund our organic growth as well as strategic acquisitions," Dahlberg wrote in a recent letter to employees and other shareholders.

The move to the public arena, with its quarter-to-quarter investor expectations, will present a new experience for the relatively quiet company. But it is prepared for the pending shift. In addition, employees will continue to hold most of the company's stock. SAIC has long prided itself on being one of the nation's largest employee-owned companies.

"I'm sure [the IPO] will bring a change to the culture, but SAIC is very performance-driven today," said Larry Allen, executive vice president of the Coalition for Government Procurement.

SAIC is not a neophyte when it comes to financial accountability. Allen said the company has had to open its books for Defense Department auditors and, in that respect, may be better prepared for public status than the typical private company.

Ray Bjorklund, senior vice president and chief knowledge officer at Federal Sources Inc., said SAIC has already been exposed to the workings of the public market as an employee-owned company. It files quarterly financial statements with the SEC and reports annually on its employee stock-purchase plan.

Preserving its heritage

To preserve its tradition of employee ownership, the company will create a separate class of preferred stock for pre-IPO shareholders. Dahlberg said employees will own 80 percent to 90 percent of the company's outstanding capital stock and will control "substantially all of the voting power."

According to a UBS Investment Research report, current SAIC shareholders will have 10 votes per share, while public shareholders will get only one vote per share.

That decision shows the company's intent to gain an influx of capital from outside investors while not turning its back on tradition, Bjorklund said.

"They are certainly very sensitive to what might happen to their employee-owned culture," he said.

Shares of publicly available SAIC common stock will represent 10 percent to 20 percent of the company's outstanding shares.

Institutional investors, such as banks or government pensions plans, will likely play a strong ownership role in the company's common stock. Such investors "are increasingly interested in these kinds of companies," Bjorklund said. "SAIC may see an IPO as one mechanism that will work well to capitalize on that interest level from institutional investors."

Allen said investors should consider the government's stability when it evaluates companies such as SAIC. The federal government accounts for 86 percent of SAIC's revenue, according to its registration statement.

"The federal government market may not be [viewed] by the financial markets of New York as particularly glamorous, but it is certainly reliable, particularly for well-established firms such as SAIC," Allen said. "The federal government always pays its bills."

Broader effects are possible

Bjorklund said he doesn't expect an avalanche of federal contractor IPOs to follow SAIC's offering. Bjorklund and Allen said the pool of companies that could make such a move is fairly small.

But the income that results from SAIC's IPO could stimulate the federal mergers and acquisitions market, observers say.

"They haven't been shy about acquisitions even as an employee-owned company," said Robert Guerra, a partner at Guerra, Kiviat, Flyzik and Associates. He said the additional funding could fuel large acquisitions at SAIC.

Other observers believe SAIC's public expansion could also extend to the integrator's partners. Michael Beckley, vice president of product strategy at Appian, said the IPO is great news for partners and SAIC employees and customers. Appian, which specializes in business process management products and services, is one of SAIC's partners.

"SAIC markets, sells and supports the products of software partners like Appian, so we all grow together," Beckley said.


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Science Applications International Corp.

Founded: 1969.

Revenue: $7.2 billion for the fiscal year that ended Jan. 31.

Growth rate: 23 percent increase compared with fiscal 2004's $5.8 billion.

Employees: 43,000.

Key government markets: National security, homeland security, health care, telecommunications, energy and space.

Contract vehicles: Applications 'N' Support for Widely Diverse End-User Requirements, Chief Information Officer Solutions and Partners 2 Innovations, Information Technology Omnibus Procurement, Millennia, Seat Management Phase II, Treasury Information Processing Support Services II and others.

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