The Washington Post October 12, 2006
Filings Illuminate IPO's Bumpy Ride
By Griff Witte
For 37 years, Science Applications International Corp. has been owned by its employees. In that time, the company has grown from nothing to an $8 billion giant that does some of the government's most sensitive work in intelligence, homeland security and defense.
But within days, those employees -- 43,100 of them, more than a third of whom live in the Washington area -- will have to learn to share their company with people who have never before had the chance to own SAIC stock: members of the public.
SAIC shares could begin trading on the New York Stock Exchange as soon as tomorrow in an initial public offering estimated to be worth $1 billion, which would be among the largest IPOs ever in the defense industry.
The shift to a public company is the culmination of a broader transformation for SAIC of San Diego, which has grown significantly in recent years and is gunning to move into the top tier of contractors. But SAIC has stumbled several times along the way. In recent public filings, it has had to acknowledge that more problems lie ahead as the government market flattens and as it continues to be dogged by questions about its performance.
"The thing that really stands out to me about this IPO is how difficult it's been for the company," said Philip Finnegan, director of corporate analysis at Teal Group Corp., a market research firm. The offering is "smaller than they were originally talking about. It's been delayed so long. And now they've had to admit some programmatic embarrassments."
As with all companies that plan to go public, SAIC was required to disclose the risks of buying its stock in a filing with the Securities and Exchange Commission. That filing shows that the company lost $123 million on a contract with the government of Greece to provide security at the 2004 Olympics in Athens, and it could lose substantially more. Greek authorities have long maintained that SAIC did not meet its obligations under the contract, and that they should get their money back.
SAIC has also been criticized for its work on other high-profile projects, including the FBI's case-management system, data-mining software for the National Security Agency and a television station for post-invasion Iraq.
A spokeswoman for SAIC declined to comment because the company is in its "quiet period" before the IPO. But the firm has defended its work in the past.
SAIC was supposed to go public earlier this year, but the company put off the IPO because it first wanted to resolve problems with the Olympics contract. The delay was ill-timed. The government contracting industry had been flying high as of early 2006, reaching the peak of the boom that followed the Sept. 11, 2001, terrorist attacks. Since then, revenue and profit have begun to level off, as have company stock prices. SAIC had originally indicated it planned to raise as much as $1.7 billion with its IPO, but a softer market meant that it had to set its sights lower.
Still, the IPO promises to be lucrative for SAIC employees, who would initially hold 81 percent of the company's shares. Not only will employees be able to sell their stock on the public market, but they will also receive a substantial dividend. SAIC has said it would return all the proceeds of its IPO and then some -- $1.6 billion to $2.4 billion in all -- to its current shareholders.
Company directors and top executives would benefit most from that arrangement, as they are the biggest stockholders. Chief executive Kenneth C. Dahlberg, for example, owns 335,927 shares, according to company filings.
But average employees would also gain if the stock performs well, and that could have ripple effects on the regional economy. SAIC is the region's fourth-largest private-sector employer with around 16,000 workers locally, many of them well-paid engineers, consultants and scientists who possess high-level government clearances and work side by side with government employees on top-secret programs.
"If experience is any guide, there will be a real impact here in terms of spending and wealth creation," said Anirban Basu, chief executive of the economic consulting firm Sage Policy Group Inc. "Often, people who find themselves in a lot of money in a short amount of time are in the habit of making a big-ticket purchase -- and perhaps several of them. This is the type of thing that gives berth to Ferraris and Bentleys."
SAIC could make some big-ticket acquisitions of its own. Dahlberg joined the company in late 2003 with the goal of rapid growth, after decades of steady expansion under founder J. Robert Beyster. Since 2004, revenue is up by more than $2 billion, and profit has more than doubled as SAIC cashed in on rising demand for high-end technology and personnel after the 2001 attacks.
"They've got whole buildings out there in Tysons Corner that are funded by agencies that we're not going to even talk about," said John E. Pike, director of GlobalSecurity.org, a Web site that tracks the defense and intelligence sectors. "They must be doing something right."
Dahlberg, a veteran of General Dynamics Corp. in Falls Church, has made no secret that he wants to put SAIC in the same league as contracting behemoths such as Lockheed Martin Corp., Northrop Grumman Corp. and General Dynamics. He has streamlined the company's structure, which had been famously decentralized, with company units sometimes competing against each other for the same work.
The IPO is intended to help the company grow even more because it would free capital that had been used to buy back employee stock. Trading is to begin at $13 to $15 a share. Fourteen dollars a share would give SAIC a market value of $5.6 billion.
But some worry that SAIC could lose something after it joins the ranks of public companies. Retired Adm. Bobby Ray Inman, former head of the NSA and an SAIC board member for two decades, said employee ownership was what drew him to the company.
"For me, the principal value of the employee-owned culture was the focus on integrity and accountability," said Inman, who left the board several years ago. "Will that be maintained now? I don't know."
© Copyright 2006, The Washington Post Company
