SAIC Sees 'Big Leg Up' in Federal Market

By Nick Wakeman, Staff WriterScience Applications International Corp.'s deal to acquire Boeing Co.'s information technology unit will bolster its telecommunications and network management capabilities ? areas with a potentially big payoff as agencies revamp entire communications networks."We have modest capabilities in that area now, but this acquisition will allow us to expand greatly in that area," said Duane Andrews, SAIC corporate executive vice president. "We'll get a big leg up in the government market." Andrews called Boeing Information Services a "perfect match" for SAIC, which has made six acquisitions since January. All of those deals have been smaller niche plays and only two were government-related. The latest deal, which was first reported by Washington Technology in the April 26 issue, does not take SAIC out of the acquisition game in the government market, company officials said. "We will continue to look and to acquire additional companies if we find the right fit," Andrews said.The biggest customers of Boeing's broad-based IT services unit are NASA and the Department of Defense. More than half of SAIC's federal work is with the Department of Defense. Among its federal customers are the Coast Guard, Navy and the Department of Energy. Terms of the deal were not disclosed but sources estimated SAIC paid about $150 million for the Vienna, Va.-based Boeing unit. In so doing, it picked up 1,200 employees and about $300 million in revenue, the companies said. The deal, announced June 11, is expected to close in 30 days."This is a real positive for SAIC. It shows they are becoming more aggressive in their acquisitions," said Douglas Schmidt, a managing director of Legg Mason Inc. of Baltimore. SAIC, the country's largest employee-owned research and engineering company, had $4.7 billion in its fiscal year 1999, which ended Jan. 31. About half of the company's revenue comes from the government; the rest comes from commercial clients.The acquisition moves SAIC several notches up in the hierarchy of government IT services companies, said Robert Dornan, senior vice president of Federal Sources Inc., a McLean, Va., market research firm. The added revenue makes SAIC one of the top players in the federal IT space, along with Lockheed Martin Corp., Unisys Corp., AT&T, Computer Sciences Corp., and Raytheon Corp."SAIC is nearly a $5 billion company, so they have to do large acquisitions," said Jerry Grossman, a director at the investment banking firm, Houlihan Lokey Howard & Zukin of McLean, Va. "This is a sizable acquisition at least in terms of what is available out there." In addition to Boeing's telecommunications and network management capabilities, SAIC was drawn to its strengths in desktop support, desktop outsourcing and large-scale systems integration, Andrews said.SAIC and Boeing began serious talks in February, said Andrews. He and Boeing Information Services President William Delaney acknowledged that other companies were interested in the property, but they declined to name them.At least one analyst doubted there were many serious contenders. "Everybody I talked to said, 'Yeah, we kicked the tires but it wasn't something we were interested in,'" said Thomas Meagher, a director at the investment banking firm, Boles Knop & Co. of Middleburg, Va.Seattle-based Boeing sought to unload its information technology unit as part of a move to focus on its core aerospace business. "We are extremely excited to be going to a parent that really has a focus on information technology," Delaney said.SAIC will keep the Boeing unit separate, with Delaney at the helm, Andrews said. The unit will shed the Boeing name and go with something like "SAIC Information Services," Andrews said. Most of the Boeing employees will stay in their current offices in Vienna, Va., although there may be some shuffling, he said.No layoffs are expected. "It is tough enough to find good people right now," Andrews said.SAIC is picking up major contracts from Boeing such as the Reserve Component Automation System, a 12-year, $1.6 billion contract Boeing won in 1991. Others are 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 nabbed that contract in 1996.SAIC is a subcontractor to Boeing on the DISN and the RCAS contracts.Being a part of SAIC should provide a boost to the Boeing unit, which has struggled with the expanded marketing requirements associated with the federal government procuring more services through task order contracts and the General Services Administration schedule, Dornan said.Boeing really never changed its marketing approach, he said. "But SAIC has, and they are very active."Though Boeing's major contracts are several years old, SAIC will get a lift with the increased talent base, Dornan said. "Good talent is hard to find and Boeing has some good talent," he said.Boeing's 1,200 employees are a sizeable addition especially as the government turns to more outsourcing, Grossman said. "This puts SAIC strategically in a much stronger position," he said.