SAIC Close on Deal To Buy Boeing Unit

By Nick Wakeman, Staff WriterEmployee-owned Science Applications International Corp. is close to finalizing a deal to purchase Boeing Co.'s government information services unit, industry sources said.The acquisition of Boeing's information and systems integration subsidiary, estimated to have annual revenue of $250 million to $350 million, would mark the second acquisition by the San Diego-based integrator in the last month. Sources estimated the Boeing unit would sell for 50 percent to 75 percent of total annual revenue. Boeing Information Services has 1,200 employees in the United States and abroad, and is based in Vienna, Va. Major customers include the Department of Defense and NASA.SAIC, which has 35,000 employees and $4.6 billion in revenue in 1998, most likely is attracted to the size of the Boeing unit, one source said. Its information technology and telecommunications services capabilities also are good fits with SAIC, he said.Neither SAIC nor Boeing officials would comment on a pending deal. But just last month, Duane Andrews, SAIC executive vice president, said his company was looking at two companies in the greater Washington area.Two weeks ago, SAIC said it had reached a definitive agreement to buy the customer relationship management business of Broadway & Seymour Inc. of Charlotte, N.C. Terms of the deal, announced April 14, were not disclosed.Boeing Information Services has been on the block for several months, but the Seattle-based parent company did not acknowledge publicly that the unit was for sale until earlier this month. In its April 7 statement announcing the sale, the aerospace company said it is "in discussions with potential buyers" and expects to name the purchaser "in the second quarter of 1999."The Boeing unit likely would remain autonomous under SAIC, which has a long history of making acquisitions and then keeping the acquired businesses as separate operating units, sources said."Not integrating [acquisitions] does not seem to bother SAIC, and it has not hurt them," an industry official said. "At $4 billion [in annual revenue], it is hard to argue that their strategy has not worked for them."SAIC also has a large stockpile of cash to invest after selling 4.5 million shares in Network Solutions Inc. of Herndon, Va., in February at $170 a share. "They have to do something to get a return on that cash," a source said.Network Solutions registers Internet domain names. The sale of the stock reduces SAIC's ownership in Network Solutions from 72 percent to 45 percent.Price also is a factor in the deal. The Boeing unit is perceived as having problems, so the price should be well below the amount of annual revenue, according to the source. And low price also has been a hallmark of SAIC acquisitions, the source said.SAIC also has the advantage of being employee-owned and can make an acquisition without worrying about short-term results or the impact on the price of its shares, a source said. "They don't have to answer to Wall Street," he said.The Boeing unit has been looked at by a number of potential buyers, ranging from large players such as Computer Sciences Corp., El Segundo, Calif., and TRW Inc., Cleveland, to companies backed by investment groups that grow companies through roll-ups, sources said.Boeing has been trying to sell the unit since at least December. The proposed sale is part of a company effort to focus more of its resources on its core aerospace business. The IT unit specializes in systems integration, logistics, networking, outsourcing and professional IT services to the government.Sources said Boeing has had difficulty attracting a buyer because of questions about the unit's contract performance and management issues.But Boeing spokeswoman Andrea McCarthy said that difficulties the government information services unit encountered on the Reserve Component Automation System, a contract most often cited by critics, were solved long ago."There were problems at one time, but our performance ratings are now in the 90s," she said. The Defense Department's Reserve Component Automation System is a 12-year, $1.6 billion contract Boeing won in 1991.According to the market research firm Input of Vienna, Va., Boeing has made about $793 million on the contract so far. When completed, the system will link 10,000 National Guard units at more the 4,000 sites."Our primary assets are our contracts and our people," McCarthy said.Other important wins by the Boeing unit include NASA's Information Resources and Management Support contract, a five-year, $200 million outsourcing contract Boeing won in late 1994, and the Defense Information Systems Network-Global contract, worth $750 million over five years. Boeing won that contract in 1996.An official with a company that looked Boeing over but did not bite said: "The unit would be too difficult to integrate with the rest of our company. ...We didn't like the culture."