SAIC divesting test unit as it makes split


SAIC Headquarters in McLean, Va. (Jeffrey MacMillan/JEFFREY MACMILLAN)
September 2, 2012

McLean-based Science Applications International Corp. rolled out dramatic changes to its structure last week, announcing that it would sell off its testing unit and split the remaining company into two public companies.

The announcements follow a strategic review under John P. Jumper, SAIC’s chief executive who took over from Walter P. Havenstein earlier this year.

Though the decision to split in two garnered most of the attention last week, SAIC said during its conference call with investors Thursday that it would divest its operational test and evaluation business, which has produced annual revenue of about $75 million.

Jumper said the company is close to completing the unit’s sale.

“By its nature, [it has] faced increasing constraints due to possible” organizational conflicts of interest, Jumper said. These conflicts are created when a company is tasked with work that could have competing interests, such as building a product and then testing it.

SAIC also provided more details during the call on the two public companies it would create: a roughly $4 billion-a-year services business specializing in areas such as systems engineering and program office support, and a $7 billion-a-year IT company working in intelligence and cybersecurity, among other areas.

Here, too, the business will benefit from eliminating potential conflicts of interest, company officials said.

Mark W. Sopp, SAIC’s chief financial officer, said the IT business in particular will be looking to purchase other companies.

“This growth-oriented company is likely to conduct meaningful M&A,” he said, adding that the services business will likely have a more limited acquisition approach.

The services business will likely see its primary competition in contractors such as McLean-based Booz Allen Hamilton, Arlington-based CACI International, Chantilly-based TASC, and others, said K. Stuart Shea, chief operating officer at SAIC. The solutions business, on the other hand, would compete against companies from General Dynamics to Lockheed Martin to Accenture to Jacobs Engineering.

Company officials denied that splitting into two businesses would create extra overhead expenses.

“Our going-in position [is] that ... one plus one has to equal a lot less than two,” said Shea. “The way we’re designing the two companies is to have an overhead structure right-sized for the kind of business that they’re in ... not just taking SAIC and replicating it in two different places.”

And company officials stressed that eliminating conflicts of interest will open up more business opportunities. During the call with investors, Shea said SAIC has identified over 150 new opportunities worth almost $25 billion between now and fiscal 2016 in the Defense Department alone.

Still, SAIC will face skeptics. William Loomis, managing director at Stifel Nicolaus, which has a business relationship with SAIC, said the company has been recently outperforming its competitors.

“I’d prefer to see the company stay together,” he said, arguing that its size gives it an advantage.

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