SAIC sets IPO terms

Defense Market Report
Exclusively for InvestorIdeas.com
By James Smith
October 04, 2006

Employee-owned Science Applications International Corporation (SAIC) has set terms for its initial public offering (IPO) of 75 million shares at an estimated price range of US$13 to US$15 per share.

SAIC is in a “quiet period,” which imposes restrictions of a company’s internal and external communications.

The company originally filed for its IPO with the US Securities and Exchange Commission (SEC) over a year ago, on September 1, 2005 with the aim of selling US$1.73 billion of common stock.

At the top end of the estimated range, the IPO will generate US$1.1 billion, or US$1.3 billion if underwriters exercise over-allotment rights to purchase an additional 11.25 million shares.

Lead underwriters and joint bookrunners are Morgan Stanley and Bear Stearns. Co-managers are Banc of America, Citigroup, Cowen & Co, Jefferies & Co, Stifel Nicolaus and Wachovia Securities.

In connection with the IPO, SAIC said it plans to pay its employee-shareholders a special dividend US$1.6 billion to US$2.4 billion.

No special dividend will be paid on shares sold in the IPO.

While the company has an impressive track record, after the IPO employees will still own 326 million shares of preferred stock, representing 81 per cent of total capital stock. Each preferred share has 10 votes while each common share has only one vote, diluting the voting power of non-employee shareholders.

In essence, after the IPO, only 2.3 per cent of voting rights will be in non-employee shareholder hands.

A quick look at SAIC’s financials shows the company earning US$209 million for the six months ending July 31, 2006 against US$682 million for the same period in 2005. However, the disparity is attributable to a one-off after-tax gain of US$542 from the sale of the company’s Telcordia unit.

Most of the gain from the sale of Telcordia in March 2005 was recognized in the first quarter of fiscal 2006, but the sale contributed US$12 million towards net income and seven cents towards diluted earnings per share for the second quarter of fiscal 2006.

The numbers for fiscal 2Q 2007 are more revealing. Revenues of US$2.1 billion for the quarter are 5 per cent from US$2.0 billion in the second quarter of fiscal year 2006. Operating income for the quarter increased 9 per cent from US$144 million in the second quarter of fiscal 2006 to US$157 million. Operating income margin increased from 7.4 per cent in the second quarter of fiscal 2006 to 7.6 per cent.

Net income for the quarter increased 6 per cent from US$97 million in the second quarter of fiscal 2006 to US$103 million.

Diluted earnings per share for the quarter increased 11 per cent from 54 cents in the second quarter of fiscal 2006 to 60 cents.

And SAIC has just landed some new business. In late September, the US Air Force awarded the company a US$26 million contract to design a second space-based missile warning sensor as part of the Alternative Infrared Satellite System program.

Also in late September, SAIC was awarded a US$45 million contract to support the 330th Aircraft Sustainment Wing at Robins Air Force Base. Again, in late September, a Raytheon-SAIC team was selected by NATO for a US$95 million missile contract.

Investors may not find the employee-centered structure of SAIC as attractive as a pure-public play. But if the company continues to post good returns, that may not be an issue.

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James Smith is an independent columnist for this web site. James Smith may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article. James Smith is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.