SAIC Inc Trades Up On News Of Plans To Split The Company

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SAIC, Inc. (NYSE:SAI) is up almost 4.5% today to $12.34 in response to the company’s announcement that it will split into two public companies. SAIC, Inc. (NYSE:SAI) is a major IT contractor to government agencies such as the Department of Defense and intelligence agencies.

According to the press release, the intention is spin off government technical services and enterprise information technology into a newly-formed company, whose 100% shares would be issued to SAIC shareholders in the form of a tax-free spin-off.

The company strategy is outlined below in the words of John Jumper, chairman and chief executive officer :

“In this next step of our strategic plan we configure ourselves for the future. Our two new companies will be designed so that their businesses can be more differentiated and more competitive in their own space.  More importantly, that addressable space will expand for each as we eliminate the burden of organizational conflicts of interest (OCI). This affords both companies an excellent opportunity to combine optimized cost structures, unrestricted access to their respective markets, and the leveraging of decades of SAIC’s scientific and engineering excellence to unleash the growth and value we can deliver to our customers, employees and shareholders.”

The main benefits of the restructuring are unlocking substantial value, promotion of internal efficiency, providing better solutions to customers, better potential for growth to employees, and better visibility for investors.

After the split, one company would focus on science and technology for national security, engineering, and health clients, and would also command $7 billion in revenues, while the other would deal in government technical services and information technology for enterprise, and have approximately $4 billion in revenues.

The split would enable the science and technology unit to have access to over $37 billion in potential contracts, hitherto limited due to conflict of interest with technical services business, prohibited by regulations.

The move could be a fallout from the impending cuts in defense spending of almost $500 billion, which are likely to take effect from January – SAIC, Inc. (NYSE:SAI) may then have to face claims of hundreds of millions of dollars, due to contract re-negotiations. “We’re cautious on revenue in the coming quarters as Washington deals with the fiscal situation and the sequestrations,” Jumper said during the second quarter earnings report.

SAIC reported net earnings that fell from $178 million to $110 million, though revenues climbed 10 percent to $2.85 billion.

Peer defense contractor Lockheed Martin Corporation (NYSE:LMT) reported that second-quarter profit rose to $781 million ($2.38 a share), up from the previous year’s $742 million ($2.14 a share). Sales increased to $11.92 billion from $11.54 billion. Analysts had expected $1.91 earnings per share on $11.3 billion sales. For 2012, Lockheed Martin Corporation (NYSE:LMT) estimates earnings between $7.90 to $8.10 a share, higher than its previous $7.70 to $7.90 a share estimates. Wall Street analysts have forecast 2012 earnings at $7.89 a share.

Lockheed Martin Corporation (NYSE:LMT)’s CEO and Chairman Robert Stevens said of the quarter’s numbers, “While the threat of sequestration has created uncertainty for our industry, the company has focused on cutting costs and program execution,” reported Bloomberg.

Morgan Stanley notes that the spin off could unlock $700 million in value, stating:

Potential to unlock ~$700MM in additional value  One of the driving forces behind the spin-off includes the potential for investors to have more clarity in how they are valuing SAI. Using our F13 pro-forma EBITDA estimates  and a set of competitors for each business, we calculate the pro-forma market cap for the businesses to be $4.7B, using
separate multiples. This represents a $700MM (18%) premium to SAI’s current market cap.

Other analysts said that the announcement raised more questions than answers, including Credit Suisse AG


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