Is SAIC creating a low-price juggernaut?

As I digest Science Applications International Corp.’s decision to split off its technical services and IT business into a separate company, I’m finding several unknowns.

Of course, it is early in the process and as a publicly traded company, SAIC had to disclose this direction before all the details were in place.

Still to come are decisions on leadership, structure and a name. Maybe we should run a naming contest. 

But less than 24 hours since the company made the announcement, here are some questions I'll be looking for answers to:

What kind of margins will the two companies have?

This will tell us a lot about what kind of company the spin-off will be. A lot of IT services these days are considered commodities so there is a lot of pressure on price and profits.

It is a little difficult to precisely identify the potential margins of the new company. SAIC breaks its revenue and earnings into four business areas: defense solutions; health, energy and civil solutions; intelligence and cybersecurity solutions; and corporate and other.

Taking "corporate and other" off the table, the other three operating segments reported similar margins in SAIC’s most recent quarter: 7.4 percent for defense solutions; 7.7 percent for health, energy and civil; and 7.5 percent for intelligence and cybersecurity.

From the way the company has described the split, I would think most of the new company will be pulled out of the defense solutions group with maybe a little from the civil portion of the health, energy and civil solutions segment.

Will the new company be a low-price juggernaut?

With the pressure on prices in the IT services arena, the new company will have the size and bulk to be a formidable competitor. When you combine that with the elimination of organizational conflicts of interest restrictions, the new company should have even more opportunities to throw its weight around.

About 75 percent of SAIC’s business is with defense customers, so civilian agencies will likely be high on the new company’s list of potential new customers.

But it’s just not going to be a sexy business. It’ll likely be more bruiser than beauty.

Did SAIC keep the crown jewels for itself?

The answer to this, of course, is yes. With OCI off the table, SAIC will chase more large prime contracts, a strategy that it has been pursuing for several years.

It’s also keeping the real cutting-edge technologies in the worlds of intell, health care, energy and cybersecurity. Over the long haul this is where the higher margin business will be and where companies can truly differentiate themselves.

Next steps?

If L-3 Communications’ Engility spin-off is the model, look for SAIC to announce sooner rather than later the person who will lead the split and be the CEO of the new company. That’s what L-3 did and it makes a lot of sense.

People will want to know who they are working for and what kind of management team will be in place.

Timing?

My guess is August or September of next year.

Maybe along with the contest for a name, we start a pool on the day the split is completed. I’m putting $5 on Sept. 24, 2013, just because I turn 50 that day.