What's To Come For SAIC?

There's something kind of sad about a hugely successful privately held company giving in to Wall Street. It's like seeing that mom-and-pop hardware store or coffee shop down the road become a franchise.

Even so, news that San Diego-based Science Applications International Corp. (SAIC) plans to go public in the beginning of 2006 reflects well on the company, which reported $5.8 billion in government revenue in 2004, snagging 24 percent growth and a fourth-place ranking on the GovernmentVAR 100 listing of leading integrators. In September, the company announced revenue of $1.95 billion for the second quarter of fiscal year 2006; that's a growth rate of 10 percent over the second quarter of the previous year.

That sort of profit leaves investors ready to plunk down significant dollars. The company aims to accommodate with $1.7 billion for insiders--rivaling Google's highly touted $1.8 billion deal in 2004.

Of course, the initial public offering (IPO) will bring with it some changes for SAIC--the first of which will be cultural, as meeting the Street's expectations becomes the top priority, and second, method of processes, as revenues are more systematically reported to a single bottom line. Right now, each area within SAIC runs somewhat as "its own little fiefdom," says Alan Webber, senior government analyst at Forrester Research, with separate profit and loss centers. That won't cut it in an environment where stock price is determined by company performance.

Given that, as the company streamlines its business processes and evaluates generated income along the way, it very well may opt to focus more on the industries that bring in the most dollars--namely government, which accounted for 30 percent of its 2004 revenue.

So, answering to stockholders could inspire SAIC to push its percentage of sales in government even higher. To do that, the company will likely expand its presence beyond defense, where it currently dominates; and to do that, it will take part in some buying of its own. The principal purpose of the IPO, according to public statements, is to better enable SAIC to "use its cash and cash flows from operations to fund organic growth and growth through acquisitions, as well as to provide SAIC with publicly traded stock that it can use for future acquisitions."

The most likely targets of SAIC will first be a combination of midtier systems integrators and security contractors to supplement SAIC's own skill set, Webber says, and second, firms that bring large Rolodexes of contacts at civil agencies and state and local government. Both Northrop Grumman and Lockheed Martin have emphasized those markets recently, and this could allow SAIC to follow their lead.

What does that mean for everyone else? Of course, vendor partners love any opportunity to enter into new areas, whether they be different sectors of government or other verticals entirely. Linthicum, Md.-based Ciena, for one, hopes the IPO and resulting acquisitions will make it easier to penetrate new areas with its own product portfolio, says Rob Rice, vice president and managing director of government at the company.

As for direct rivals, it means an even more formidable foe. The announcement is something Chantilly, Va.-based American Systems Corporation (ACS) will track closely, says CTO Brian Neely, and something that will simply cement SAIC as a competitor, says Mac Slingerlend, president and CEO of Greenwood Village, Colo.-based Ciber.

That said, is an IPO the smart way to go? Cary, N.C.-based SAS hasn't gone that route, instead opting to remain the world's largest privately held software company. SAS, which provides solutions that are tailor-made for government agencies and education organizations, reported revenue of $1.53 billion in 2004. But software development is a different beast than government integration. For software development, success is determined largely by innovative technology and delivery; for government integration, success is determined by both of those things, as well as widespread exposure and recognition. SAIC, of course, achieved that privately; but it stands to compound that tenfold with its entrance on Wall Street if growth continues--just look at how many of those mom-and-pop coffee shops are now Starbucks.