SAIC ponders IPO to fund acquisitions

Giant defense contractor Science Applications International Corp. of San Diego is considering changing its long-standing tradition of employee ownership to sponsor an initial public offering to raise cash for acquisitions.

"The board is evaluating improvements to our capital structure, including taking on additional debt, increasing purchases of stock by employees and raising capital and providing stockholder liquidity through an initial public offering or private placement of our stock," Chief Executive Kenneth Dahlberg wrote in an interoffice memorandum June 6. The three-page memo is attached to the company's 10-Q form filed on that date.

A public offering presumably would end SAIC's status as the largest employee-owned research and engineering company in the nation with 45,000 employees. However, in the memo Dahlberg offered reassurances that the culture would be kept regardless of what capital structures are pursued.

"Each of these options can be structured in a way that preserves the essential characteristics of our employee ownership culture," Dahlberg wrote.

Driving the need to examine the options is the consolidation in the defense and homeland security IT solutions markets. Last week, for example, defense contractor L-3 Communications Inc. agreed to buy Titan Corp. for approximately $2.65 billion in cash and assumed debt.

"Completing strategic acquisitions will be increasingly important to our company's future as our competition consolidates into fewer and more formidable companies, more aggressively targeting our market space," Dahlberg wrote in the memo.

Market conditions are favorable for several of the options to increase capitalization, Dahlberg wrote.

"We are fortunate in that the external market conditions affecting several of these options currently are very favorable ? the cost of debt still remains at historically low levels; the public equity markets have been receptive to premier companies like ours; and there generally is a ready supply of private equity capital," he wrote.

SAIC announced Monday first quarter 2006 revenue of $1.8 billion, which is a growth rate of 8 percent over revenue of $1.7 billion for the previous year's first quarter. Operating income was $112 million, compared to $120 million during the same period last year. SAIC officials attributed the decline in part to a loss on the contract with Greece to provide security for the 2004 Athens Games.

The $7.2 billion company is one of the Pentagon's top 10 largest prime contractors. SAIC ranked No. 3 on Washington Technology's 2005 Top 100 list of federal prime contractors.

In March, SAIC completed the sale of the Telcordia Technologies division, which had been a large portion of SAIC's commercial sales. Recent acquisitions include ProcureNet Holdings Inc., a procurement technology firm in Fairfield, N.J., with annual revenue of $250 million; as well as Fairfax, Va.-based Presearch Inc. and Trios Associates Inc.

More than 90 percent of SAIC's business is in government, and about 65 percent is with the Defense Department, much of it classified intelligence work.