SAIC Approaches Wall Street

With all signs pointing to an IPO by San Diego-based Science Applications International Corp. (SAIC), companies that expand the mega solution provider's market penetration stand to get swallowed.

Last month, SAIC announced plans to go public, expecting the IPO to commence in early 2006. Executives point to preservation of future operating cash flows, currency to pursue acquisitions and greater liquidity of shares for stockholders as driving the company's decision. According to SEC requirements, SAIC must remain in a quiet period until about a month after the IPO.

Of course, the announcement certainly has others talking--from competing VARs to vendor partners to market analysts. SAIC reported $6.7 billion revenue in 2004, snagging 14 percent growth and a ninth-place ranking on the 2005 VARBusiness 500 listing. The company aims to raise $1.7 billion for insiders.

"SAIC has been the model ESOP [Employee Share Ownership Scheme] company, so the announcement is something we have been tracking closely," says Brian Neely, CTO at Chantilly, Va.-based American Systems Corp. (ACS).

Greenwood Village, Colo.-based Ciber, which also plays in the government space, will also keep a watchful eye.

"They are a meaningful competitor in the federal space," says president and CEO Mac Slingerlend. "While I think an IPO would be primarily for employee retention and founder liquidity, I don't think it will change them as a competitor; they will handle being public well."

According to the company's Web site, SAIC's relationships with customers, suppliers and employees won't change. In fact, most expect initial changes to happen within.

"SAIC is going to have to make significant shifts in how they manage their work internally," says Alan Webber, senior analyst of government at Forrester Research. "That might put the company in disarray for a year or two. The way the company is laid out right now, each [division] within SAIC has its own little fiefdom with a complete P&L [profit and loss] center. That won't work once the company goes public because the revenues aren't consistent--Wall Street and investors won't put up with it."

Of course, once the introductory period is over, SAIC stands to grow bigger than ever. The company's structure will remain essentially the same, Webber expects, with government business dominating the company's bottom line but remaining intact, versus being spun off from the commercial end of the company as some might expect. But with outside stockholders to answer to, the company will be forced to redistribute its priorities.

"Public companies tend to implement a decision-making process to ensure meeting quarterly 'Street' expectations," says Rick Marcotte, president and CEO of government solution provider DLT Solutions. "SAIC will be driven in that direction right from the start, and that could be disruptive to their existing internal culture. I also would expect them to be more aggressive on the acquisition front to try to meet their stated growth objectives and gain ground on some of their well-known rivals."

That means select smaller solution providers may find themselves pulled under the SAIC umbrella.

"Certainly, from our perspective, that just broadens the opportunity base that SAIC offers to us as a partner--perhaps offering up our product portfolio under the covers in areas that we haven't been able to penetrate in the past," says Rob Rice, vice president and managing director of Ciena Government. "This provides a great chance for the company to gain exposure and recognition in different areas."