SAIC, Aerospace Match Faces Pentagon Review

The merger hinges on approval by the Defense Department

Science Applications International Corp. and the Aerospace Corp. have announced their intent to wed, but it will take months for the Department of Defense to grant the marriage license.

"There are a zillion things" to review, said one Pentagon official. For example, Aerospace will need to show that its merger with the for-profit SAIC, based in San Diego, won't skew its advice to Air Force managers, he said.

Aerospace's core business - the non-profit, $300 million Federally Funded Research and Development Center, which provides impartial analysis to government managers -- will not be split into different units, according to Mark Albrecht, senior vice president at SAIC.

The proposed merger should be welcomed because it demonstrates that the FFRDCs can be supplanted by commercial companies, said Heather Rosenker, a spokeswoman for the Professional Services Council. The council, based in Vienna, Va., represents commercial companies, including SAIC, working in the systems integration business and has long sought to restrict the FFRDC's activities.

"We couldn't be more pleased.... This is a home run for us," partly because it sets a precedent for additional buyouts of FFRDCs, she said.

The merger will be a done deal by Jan. 31, 1997, said Ronald Sable, Aerospace's vice president of space technology applications.

"This is an unusual, unique arrangement. We need to have the approval of two boards, the Air Force and the state, but we are optimistic," said Albrecht.

In 1995, 93 percent of Aerospace's $330 million business was Defense Department. Half of the remaining part was with NASA, amounting to $8 million to $10 million.

"I'm not endorsing this company but I am thrilled to see Aerospace Corp. go into the competitive domain," said NASA administrator Dan Goldin in an Aug. 27 interview.

"One of the biggest issues is the need to transition out of the approach we had in aerospace during the Cold War where government relied on dedicated system engineering services [such as Aerospace Corp.].... As we go into the 21st century and restructure the space industry, we need much more objective systems engineering support," he said.

SAIC employs 22,000 worldwide, including a large facility in McLean, Va. In 1995, SAIC's revenue reached a record $2.15 billion.

Aerospace Corp.'s primary revenue is from a long-standing Pentagon contract to operate one of the Defense Department's 11 federally funded research centers. The centers were established to provide unbiased advice to Air Force program managers overseeing the development of satellites and complex information networks. For example, Aerospace officials review contract bids or technology upgrades offered by defense contractors, such as Lockheed Martin Corp., based in Bethesda, Md.

However, the FFRDCs have been hit hard by Pentagon funding cuts over the last several years. The FFRDC's commercial rivals have also persuaded Congress to set a $1.2 billion funding cap on the FFRDCs, prompting some to seek alternative revenue sources.

For example, Mitre Corp., based in Bedford, Mass., last year spun off a new division from its FFRDC intended to win commercial contracts from the banking and health-care sectors. Mitre was given approval to create the new division, which also includes a for-profit subsidiary, only after careful review by Pentagon officials. The review was intended to ensure the FFRDC would remain insulated from commercial pressures that might sway its technical advice. Industry critics also worried that the new division might disclose to defense contractors proprietary information to Mitre's commercial division.

Pentagon and Air Force officials will approve the merger "if they feel they are going to get the [unbiased] service," said Julie Noufer, an Alexandria, Va.-based consultant. Air Force officials "don't care what Aerospace does with the rest of the company" as long the FFRDC provides unbiased advice, she said.

Both Albrecht and Sable said the merged company will continue to give impartial information to the Air Force. "We do that today," said Sable. "We will not pursue business independently that will cause us to have conflict."

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