Secretive SAIC Goes Public

The federal contractor that works on many hush-hush military and security projects has filed for an IPO. The big winners: Its workers

By Ronald Grover

What's the reward for working for a supersecret federal contractor? Plenty, if you happen to be employed by San Diego-based Science Applications International Corp. SAIC, which generated a healthy chunk of its nearly $7.2 billion in revenues last year from work for the Pentagon and Homeland Security Dept., filed for an initial public offering on Sept. 1.

The big winners? The more than 42,000 employees -- nearly half of them with top-level security clearance -- who are shareholders. They will share as much as $1.8 billion in special dividends when the company goes public, as well as continue to own as much as 90% of the newly created company.


  Few companies are as secretive as SAIC, which has assiduously shunned public attention since it was started in 1969 as a consulting firm by one-time Los Alamos National Lab physicist J. Robert Beyster. Under Beyster, SAIC has grown into one of the country's largest employee-owned companies. Workers, who developed tiny robots to fly unmanned spy planes and radiation-sniffing scanners to inspect cargo containers at U.S. ports, own shares in the company that are traded by an internal brokerage it calls Bull, Inc.

As of Apr. 30, according to the IPO filing, employees and retirees own 174.8 million shares of the company's common stock and 216,593 shares of its supervoting B shares, which values the staff stake in company at $9 billion, according to internal trades in June. The outfit hasn't disclosed how much it plans to raise.

The IPO is planned for early next year, following a vote by existing employee shareholders on a merger of the old company into a newly created public company, to be called SAIC Inc. A SAIC spokesman wouldn't comment further.

Employees will now get special dividends of $8 to $10 per share for their common shares and $160 to $200 for their B shares. In addition, they will also swap those shares for stock in the newly created company.


  The reason for the big payout? The company says it has paid $2.5 billion of its own cash to redeem employee-owned stock over the last five years and would rather be using its own cash to "fund organic growth," including acquisitions. So, it's tapping the stock market to offer its workers the hefty payout.

"An IPO will preserve cash flows to be used to implement our vision and strategy," SAIC Chairman and CEO Kenneth C. Dahlberg wrote to employees, as well as to "offer SAIC shareholders greater liquidity for their shares should they desire to diversify their holdings."

Still, SAIC isn't eager to turn the company over to outsiders. As part of its IPO, it will swap each of its common shares for two shares in the new company and each preferred share into 40 common shares, a move that will give current shareholders "80% to 90% of the [company's] outstanding capital stock and possess substantially all of the voting power."


  SAIC's IPO would be welcomed by rating agencies, such as Standard and Poor's. S&P has a negative outlook on the company's bonds due to the use of its own cash flow for a "more aggressive posture toward growth," according to analyst Phillip Schrank, who wrote that an IPO would eliminate the need to "divert part of its cash flow to provide liquidity to its current employee shareholders." Over time, Schrank figures, the "more effective deployment of its cash flow" could allow him to upgrade the outlook from negative to stable.

True to its cloak-and-dagger past, SAIC's public documents don't reveal much about what the company does beyond the basics of its $6.2 billion in revenue -- or 86% of its overall business -- it received from federal contracts last year. Not surprising, its revenue have spiked since September 11 and the Bush Administration's war on terrorism, with revenue swelling from $4.8 billion in 2003 to $7.2 billion in 2005. For its most recent year, ended Jan. 31, 2005, the company recorded net income of $409 million.

Among the contracts SAIC lists in the public documents is a $3 billion deal, in which it has partnered with Boeing to create a 19-system network that will help the Army keep track of troop and equipment deployment throughout the world. There's mention of a $450 million contract to build a high-speed network to link 100 U.S. military bases, posts, and stations worldwide. SAIC also discloses that it helped develop the software for a hand-held unmanned plane called Dragon Eye that gave U.S. Marines in Iraq infrared surveillance videos.


  Even in the world of spy satellites and security monitors, SAIC has to fight to get paid for its supersecret work. The company is currently locked in battle with the Greek government over a 10-year, $305 million contract it was awarded to create a communications system and command center for that country's military to maintain security for the 2004 Athens Olympics and afterwards.

SAIC says it has been paid $151 million of that amount but has recorded losses of $54 million. The Greek government has disputed "various technical, legal, and contractual issues," says SAIC and hasn't made its payments after accepting the system. If the two sides can't resolve their differences in arbitration, the IPO filing notes, it "could have a material adverse affect on the company's consolidated financial position, results of operations, and cash flow."

That's quite a public airing for a company that for decades has kept to its cloistered San Diego campus. But in coming weeks, SAIC may have to reveal more about how it helps spies and boosts America's armed forces in the war against terrorism. Imagine the road show: Analysts may have to get security clearance, and the guys in the front row may be double agents.

Grover is BusinessWeek's Los Angeles bureau chief

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