SAIC to split into two public companies

August 30, 2012

McLean-based Science Applications International said Thursday it plans to split itself into two public companies, taking a major step to unwind a strategy that attempted to more tightly integrate its historically independent units.

The decision comes just months after SAIC appointed its fourth chief executive, retired Air Force Gen. John P. Jumper, with a mandate to reenergize the business.

SAIC was historically known as one of the most entrepreneurial of contractors. Founded by a physicist who led the business for more than three decades, SAIC’s units operated autonomously, and managers were encouraged to pursue their own work.

But Walter P. Havenstein, the previous chief executive, moved the company toward a more integrated approach, arguing that the government’s focus on large contracting programs favored companies that could deploy a wide range of skills. The company struggled under the strategy, watching its profit and revenue decline.

SAIC said it plans to separate into two parts by the end of next year. A roughly $4 billion-a-year services business is to focus on areas such as systems engineering and technical assistance, financial analysis and program office support.

An estimated $7 billion-a-year IT company — which SAIC is calling a “solutions” business — will focus on science and technology for the national security, engineering and health sectors. Communications and intelligence systems as well as electronic warfare and cybersecurity programs would be a part of the offerings.

An SAIC official said in a conference call with investors that the company could not offer details on who would lead the companies or where they would be headquartered.

In addition to a strategic shift, SAIC said the move addresses the real or perceived conflicts of interest that are created when a contractor provides multiple services to the government, such as having one unit build a system and another responsible for its testing.

SAIC said each new company would be more competitive and able to pursue a strategy tailored to its work.

The separation in some ways echoes that of SAIC’s neighbor, contracting giant Booz Allen Hamilton, which split off from its commercial business several years ago. The company’s chief executive has said that he tried to keep the two businesses together as part of a grand “one-company” strategy but it did not yield the results he had hoped.

The split also follows the moves of other defense contractors, from McLean-based Northrop Grumman to Bethesda-based Lockheed Martin, to divest their services businesses to avoid conflicts of interest. Northrop split off Chantilly-based TASC, while Lockheed sold its Enterprise Integration Group.

More recently, L-3 Communications divested its services business — now known as Engility — in an effort to improve its overall profit margins. Services, an L-3 executive said, have become less profitable as the government pursues the lowest price.

Also Thursday, SAIC reported profits of $110 million (32 cents per share) in the three-month period ended July 31, down from $178 million (50 cents) in the same period a year earlier. Quarterly revenue grew by almost 10 percent, to $2.8 billion.

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