Top Private Defense Contractor Plans an IPO to Rival Google's

An IPO at SAIC, which employs 16,000 in the Washington area, could make some millionaires.
An IPO at SAIC, which employs 16,000 in the Washington area, could make some millionaires. (By Robert A. Reeder -- The Washington Post)
By Renae Merle
Washington Post Staff Writer
Friday, September 2, 2005

Science Applications International Corp., the largest privately held defense contractor, announced yesterday that it would go public early next year,aiming to raise $1.7 billion for insiders cashing in on the post-Sept. 11 government spending boom that fueled the firm's growth.

The public offering would rival Google Inc.'s $1.8 billion deal in 2004 in size and be the largest IPO of a government contractor in many years. The chief beneficiaries will be SAIC's more than 35,000 shareholders, which include many current and former employees, some of whom stand to make millions of dollars. The company has 16,000 employees in the Washington region.

In a Securities and Exchange Commission filing, the San Diego-based company outlined its government work, which accounted for 87 percent of its $7.2 billion in revenue last year. Many of the company's 10,000 contracts are with the Defense Department, where it is known not for weapons, but for managing large projects to integrate information technology systems, including several in the intelligence field.

SAIC cited its role in the Army's $100 billion modernization project, known as the Future Combat System, as one of its largest contracts. The filing did not hint at what type of classified work it does, but noted that about 20,000 of the firm's 42,500 employees have security clearances.

It listed among its largest contracts one called "Trailblazer Technical Development Program," which has a "confidential" customer. Press reports have identified it as a modernization project at the National Security Agency, the agency that intercepts foreign communications.

It also noted that SAIC is developing a wireless sensor, known as "smart dust," that can "self-configure into a network and gather and fuse information into actionable intelligence information."

The increased government spending after the Sept. 11, 2001, terrorist attacks "has had a favorable impact on our business," the filing said. "Our results have also been favorably impacted by increased outsourcing of IT [information technology] and other technical services by the U.S. Government."

In citing potential risks for investors, the filing noted that the company had uncovered material weaknesses in internal controls for income tax accounting this spring. And it noted that the company is still in a dispute with the Greek government over a large security contract for the 2004 Olympic Games.

The IPO announcement has been expected since June when chief executive Kenneth C. Dahlberg told employees the company was considering several options for growth. An IPO will allow "us to sustain our culture," Dahlberg said in a letter to employees yesterday, noting that they would retain control of the firm.

The public offering also is expected to help SAIC reach a goal set by Dahlberg to reach $12 billion in revenue by 2008. The company has made several acquisitions in the last two years. As a public company, SAIC would be able to target larger companies for acquisition, offering its stock, instead of cash, analysts said.

"They've probably been the most active buyer in the federal IT market over the last two or three years," said Robert D. Kipps, the head of the aerospace and defense group at Houlihan Lokey Howard & Zukin, an investment bank.

The challenge will be maintaining focus on long-term growth goals while answering the daily pressures of Wall Street, they said.

SAIC said it has not determined how many shares to offer or the price range. Its ticker symbol is expected to be SAI.

As an employee-owned firm, SAIC is unlike its chief rivals in the defense market. The company's internal stock is priced four times a year by the board of directors. The price is $41.80 as of June 10, down slightly from $42.27 in April. That values the company at $7.6 billion.

Employees who have bought or accumulated hundreds or thousands of shares through bonuses stand to make a significant return if the company goes public. The filing said "all or substantially all of the net proceeds" of the IPO would be used for a special cash dividend for shareholders. The dividend is expected to be worth between $4 to $5 a share.

Among SAIC's largest shareholders is Duane P. Andrews, who was promoted to chief operating officer this year and holds 406,489 shares, and John H. Warner Jr., SAIC's chief administrative officer, who holds 350,066 shares, according to the filing. Dahlberg, a former General Dynamics Corp. executive who joined SAIC last year, holds 87,434 shares.

Staff writer Terence O'Hara contributed to this report.

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