Contracting giant SAIC takes final step in split into two public companies

September 30, 2013

McLean-based Science Applications International Corp. on Monday took the final step in its effort to split into two as shares in each company began trading publicly.

The Virginia contracting giant has spent more than a year dividing into two: a $4 billion government-services company that will retain the SAIC name and a $6 billion technology company that will be known as Leidos, clipped from the word kaleidoscope.

On Monday, Leidos — trading on the New York Stock Exchange under the ticker symbol LDOS — closed at $45.52 a share, up 3.1 percent. SAIC’s stock, trading under SAIC, fell 4.3 percent to close at $33.75.

William Loomis, a government-contracting industry analyst for the financial-services firm Stifel Nicolaus, said the spun-off company, in this case SAIC, typically performs worse than the surviving company — at least at first.

“After a little while, it stabilizes and starts trading at a normal fashion,” he said, adding that both stocks’ prices were within the range he expected.

The split represents a major reversal of the company’s recent strategy, which was to more tightly integrate SAIC’s historically independent units, and reflects the uncertain times facing defense contractors.

As government spending declines, contractors are repositioning — through divestitures, acquisitions and, in this case, a split — to survive.

SAIC used to be known as one of the most entrepreneurial businesses, as units operated nearly autonomously and even competed against each other.

But in recent years, the contractor shifted to a more coordinated approach in order to better compete for big-dollar, broad-based contracting programs. Walter P. Havenstein, SAIC’s former chief executive, argued that the government’s increasing use of a procurement strategy that preselects a pool of companies to win future work favored contractors that could offer a wide range of skills.

But SAIC floundered in recent years as profit and revenue declined and the company was plagued by problems, most prominently the fallout from a scandal over a New York City contract that it settled for $500 million.

In its most recent quarter, the company saw profit fall nearly 62 percent from the same quarter the prior year and cut financial projections for fiscal 2014.

The split signals a new start for the business. The 14,000-employee SAIC focuses on government services, from systems engineering to financial analysis, and remains based at the company’s McLean campus. The contractor is led by Tony Moraco, who has been at SAIC since 2006.

The 23,000-employee Leidos offers science and technology for the national security, engineering and health sectors and will be run by much of SAIC’s existing leadership, including John P. Jumper, its chief executive. Its headquarters is in Reston.

To create two new stocks to represent the separate companies, stockholders last week received a pro-rata dividend of one share of common stock in the company that retains the SAIC name for every seven shares of common stock held within the former company, and every four shares of stock in the former SAIC were combined into one share of Leidos.

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