Inside SAIC's pending divorce

When the leaders of Science Applications International Corp. got ready to announce last summer their plans to divide into two separate companies to better address the demands of the marketplace, they had to think about how to minimize the distraction to their employees, the majority of whom did not yet know of the planned split.

The initial design, which involved a small number of people, began in February 2012, said K. Stuart Shea, SAIC’s chief operating officer. The majority of the company’s employees did not know of the plan until it was publicly announced in an earnings call that took place on Aug. 30.

The company had a lot to lose; after all it is ranked No. 5 on the 2013 Top 100 with $6 billion in prime contracts. Overall, the company has more than $11 billion in total revenue.

“When we finally started bringing everybody into the fold, we were very specific with our employees,” Shea said. “We told them that 99 percent of the people in the company needed to stay focused on delivering to our customers. That was absolutely imperative.”

To assuage employee anxiety, the leaders of the company asked the workers to trust them to do the right thing on their behalf. In return, the leadership promised to put together a map that would provide key information for each major event on the road to the split.  

“We did a reasonable job of communicating the enormity of information that everyone wanted to know, had to know and needed to know in a time scale that made sense,” Shea said.

The company’s intent to split into two publicly traded independent companies, which is expected to occur at some point between July and January 2014, entails the creation of a new $7 billion entity known as Leidos that will draw 30 percent of its revenue from the commercial sector and be focused on delivering innovative technologies to specific sectors such as national security, engineering and health. 

The smaller $4 billion entity, which will retain the SAIC name, will deliver repeatable solutions, such as IT and technical services, to the government sector.

“You have a future SAIC that is really a pure-play for defense and government [and] has a track record of successful performance,” Shea said. “Leidos, by comparison, will develop new, innovative ways to solve problems.”

The markets that Leidos will address have an underlying thread that ties them together from a technology standpoint, Shea said. For example, they involve working with large volumes of information that require sophisticated data analytics.

At the same time it was developing an internal strategy for the split into two companies, SAIC also was taking steps to prepare for the automatic cuts embodied in the budget sequestration that began on March 1.

Sequestration didn’t occur overnight, of course. About the same time Congress passed the law in 2011 stating that if it failed to craft a compromise to reduce the deficit then $1 trillion in across-the-board budget cuts would occur, SAIC’s leaders began efforts to increase the company’s flow of contracts.

“We doubled our focus in areas that make a lot of sense to us strategically,” Shea said.

One of the areas in which SAIC strengthened its capabilities and increased its project bids is commercial health IT. SAIC acquired Vitalize Consulting Solutions and maxIT Healthcare in 2011 and 2012, respectively, which became the platform for SAIC’s commercial electronic health IT business, Shea said.

Similarly, the company ramped up its engineering capabilities, and it began to bid on more environmental and energy projects. 

“We are a prolific bidder to begin with, but we really focused on increasing our pipeline and doubling our focus in areas that make a lot of sense to us strategically,” Shea said. 

The increase in commercial work is designed to serve as a counterbalance to any dip in the company’s defense and national security work that might occur as a result of sequestration, he said.

To continue to thrive in the challenging defense and national security environment, SAIC is keeping a tight focus on enduring programs that will continue to be funded despite the sequestration, such as intelligence, surveillance and reconnaissance programs, Shea said.

SAIC believes that the Defense Department will continue to need airborne ISR capabilities in southwest Asia and other global hot spots. He also said that the shift in U.S. military assets to the Asia-Pacific region is likely to produce a number of opportunities for maritime ISR.

“We’re starting to see a big push in maritime ISR, and that’s where we see some of our research and development investments paying off in future bid opportunities,” Shea said.

The Defense Department’s quest to expand maritime ISR is well under way, and SAIC is playing a key part in it, Shea said. For example, SAIC won a three-year, $58 million contract in November 2012 from the Defense Advanced Research Projects  Agency to design and build a prototype of for agency’s Anti-Submarine Warfare Continuous Trail Unmanned Vessel (ACTUV) program. The goal of the ACTUV program is to build an unmanned underwater vessel capable of tracking and locating  submarines in the deep sea that threaten U.S. naval forces.

“This is a big maritime program that will have some real legs in the future,” Shea said. “A lot of the investment we made a couple of years ago has turned into programs that could go into full-scale production.”

SAIC’s defense customers include the Army, Navy, Air Force, Defense Intelligence Agency and Defense Information Systems Agency. Among the company’s key civilian agency customers are NASA, National Science Foundation, Library of Congress, and the Energy, Homeland Security, and State departments, 

SAIC has a seat on nearly a dozen major governmentwide acquisition or indefinite-delivery, indefinite-quantity contract programs that produce a steady stream of task order contracts from defense and civilian agencies. SAIC officials believe that after the split the company will be better able to address individual customers’ needs.

At press time, SAIC was waiting for the Security and Exchange Commission and IRS to make recommendations and decisions about various aspects of the split, such as whether it will be a tax-free spin, Shea said.

Shea does not foresee any major sticking points. He says the company is ready for the split.

“[We are] like a racehorse stuck in a stable,” he said. “We all value the history we had, but are excited about moving forward.”