SAIC Is Poised to Gain From the War on Terror

Offer Puts Up a 19% Stake, But Employees Will Retain

Nearly All the Voting Power

By LYNN COWAN

Wall Street Journal, October 9, 2006; Page C4

On the small list of very big initial public offerings of stock that have priced this year in the U.S., there has been one star, MasterCard Inc., and one flop, Warner Chilcott Ltd. This week there is another $1 billion-plus offering to hit the markets, and early indications show that it could lean more toward the glitter of MasterCard than the gloom of Warner Chilcott.

San Diego-based defense contractor SAIC Inc., which has been employee-owned since it was founded in 1969, is trying to raise as much as $1.13 billion in an IPO on the New York Stock Exchange. Previously known as Science Applications International Corp., the company specializes in providing services such as information technology and research to the federal government.

Thanks to the Bush Administration's war on terror and a trend toward U.S. government outsourcing to private companies, SAIC has seen its continuing revenue and backlog of contracts swell in recent years. If it prices its stock at $14, the midpoint of its expected range, the company will be offering new investors a discount to its industry peers, on a price-to-earnings basis.

SAIC's management is likely even more motivated than most companies to aim for a good market reception for its stock because of its employee-owned structure, says Francis Gaskins, president of research site IPODesktop.com. The company is selling 19% of its stock in the offering, but because its employees hold supervoting preferred shares, they will control 98% of the company's voting power.

"They're pricing it so that it will go up. If the deal becomes a broken IPO, that's not good for employee morale," says Mr. Gaskins. "They don't want dissatisfaction at the water cooler."

But Mr. Gaskins and others caution that a good initial market reception is no guarantee of strong longer-term performance from SAIC. New investors may be uncomfortable with the level of control that employees exercise over the company, says JSA Research analyst Paul Nisbet.

The U.S. defense-contract bidding process has also shifted in recent years to a system that has increased competition and made it more difficult to predict the final revenue that companies will book, he says. In its prospectus, SAIC warns that it may not be able to maintain its historical profit margins under such contract structures.

"After the initial competition, the government boils the competitors down to five or so approved contractors who then have to compete again for each individual task order in the contract. So you really can't tell in advance how much a large contract will be worth to any one company," Mr. Nisbet says of the system, known as indefinite delivery/indefinite quantity contracts. "And these have become increasingly more prevalent."

Elsewhere in the IPO market: EHealth Inc. is scheduled to list this week on the Nasdaq Stock Market. The company, which has a history of annual losses, sells health insurance online to individuals and small businesses.