Science Applications International Corp., one of the larger federal contractors, is considering an initial public stock offering to raise the funds necessary to be a bigger player in the rapidly consolidating industry.
Chief executive Kenneth C. Dahlberg sent SAIC's more than 42,000 employees a memo Monday saying the company was considering a number of options for raising cash, including some that could change its longtime status as one of the largest employee-owned companies.
The company issued a statement yesterday saying its board will "identify the path forward in the next few months" but declined to comment further.
Based in San Diego, SAIC has its biggest operating division in McLean. It employs nearly 16,000 people in the Washington area. In the 1980s, the company was built doing super-secret work for the Pentagon and the nation's intelligence agencies. Today it is one of only a handful of prime contractors big enough to handle the massive systems integration work the federal government undertook after Sept. 11, 2001, to make disparate agencies communicate better.
More than 90 percent of its more than $7 billion in revenue last year came from government clients, and 65 percent of that was in the defense and intelligence arena, according to the company's annual report. Its contracts have included operating the world's only supercomputer for biomedical research, guarding sensitive data for the Department of Agriculture, helping the Army train foreign-based units over the Internet, and building television and radio stations in Iraq.
Brian W. Ruttenbur, managing director in Morgan Keegan & Co.'s equity capital markets office who follows the homeland defense industry, said SAIC is unique for a private, employee-owned company because of its rapid growth and its widening girth. "They are absolutely massive," he said. "Given their position and the valuation of companies out there in the sector, I would think it would be very attractive" as a public company.
A stock offering could make SAIC's employees, thousands of whom have already become wealthy from SAIC's rocketing value in the past decade, even richer. It could also free up billions of dollars the company has been spending to maintain an internal market for employee stock to buy other companies.
"We are examining our capital structure to ensure that it can provide the resources we need to execute our strategic growth objectives," Dahlberg said in the memo. "The board is evaluating improvements to our capital structure, including taking on additional debt, increasing purchases of stock by employees, and raising capital and providing stockholder liquidity through an initial public offering or private placement of our stock."
He added: "The cost of debt still remains at historically low levels; the public equity markets have been receptive to premier companies like ours; and there generally is a ready supply of private equity capital," he said.
Only SAIC employees can buy or be given stock in the company. The stock is priced four times a year by the board of directors, and employees can trade it through the company's internal stock brokerage.
SAIC's current stock price of $42.27 is more than 14 times what it was in 1993. At that price, the company's internally set value is more than $7.3 billion. That's about $155,000 per employee, though for longtime executives who have amassed tens of thousands of shares through bonus and option grant programs, the stake can run into the millions, according to filings at the Securities and Exchange Commission.
This system of ownership -- and a commitment from the company to create a market for the stock -- has been a major cash drain on SAIC in recent years. Younger, newer employees have not been buying stock at the same levels their longer-serving colleagues once did, according to one 15-year SAIC veteran, who spoke on the condition of anonymity because he was not authorized to speak to the media. And as older employees -- who have the most stock -- retire and sell their SAIC holdings, this has created imbalances between sellers and buyers that the company has remedied by buying the stock itself.
SAIC's board brought in Dahlberg from General Dynamics Corp. in 2003 to replace retiring founder J. Robert Beyster. Dahlberg has sought to change SAIC's famously decentralized culture -- different divisions often competed for the same contract -- and set an ambitious growth strategy. His goal is to reach $12 billion in revenue by 2008, a feat possible only with acquisitions. So far, Dahlberg has pursued mostly smaller contractors in niche areas.
Whatever happens, Dahlberg told employees, SAIC will try to keep its employee-owned culture, if not its status. "Each of these options can be structured in a way that preserves the essential characteristics of our employee ownership culture," he said.