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Employee-Owned SAIC Completes Successful IPO
By David Binns, Beyster Institute Staff
 
Science Applications International Corporation (SAIC), the fourth largest majority employee-owned company and the largest employee-owned research and engineering firm in the U.S., marked a transition to a new era by completing an initial public offering (IPO) of its shares on the New York Stock Exchange on October 13, 2006.
Founded in 1969 by Dr. J. Robert Beyster, SAIC has been entirely owned by current and former employees throughout its 37-year history leading up to the IPO. Indeed, SAIC’s entrepreneurial, performance-based culture has influenced many entrepreneurial growth companies, particularly in the technology field, looking to emulate its successful employee ownership strategy. Dr. Beyster also established the Foundation for Enterprise Development and the Beyster Institute to promote the ideas of entrepreneurship and employee ownership as a means to help improve U.S. competitiveness.
SAIC today is a leading systems, solutions and technical services company that works primarily in the federal government contracting arena. The company employs over 43,000 people in 150 cities worldwide and reported revenues of $7.8 billion in 2006. SAIC’s technical expertise spans a broad range of disciplines from defense transformation, intelligence and homeland security to logistics and project support, systems engineering and integration, research and development, and commercial services.
SAIC’s employee ownership formula, which has been so vital to the company’s success, was really something that the company just stumbled onto in its early days. Rewarding people with ownership for helping to grow the business just seemed logical to SAIC’s founder, J. Robert Beyster. “Not just one or two at the top,” says Beyster, “but a company in which those who are motivated and capable can organize, manage, and assume the risk of different aspects of the company. In return they receive not only salary, but ownership of the company.”
Over time, that simple strategy evolved into a sophisticated and innovative employee ownership system that featured virtually every conceivable equity incentive program. SAIC employees may receive stock bonuses or stock option awards, purchase stock directly, or gain ownership through the company’s retirement plans. Historically, SAIC allocated pools of stock annually to managers throughout their many operating divisions and encouraged managers to use stock awards to reward and incentivize employees for helping to grow the business. Thanks to those programs, SAIC stock ownership is spread broadly across their employee base. SAIC’s employee ownership system also featured a wholly-owned subsidiary that managed an “internal stock market” to enable virtually all SAIC employees to buy and sell company stock on a quarterly basis. SAIC’s comprehensive employee communications programs used a variety of media to provide employee-owners with detailed information about the company’s finances and operations.
SAIC’s decision to go public was prompted by a desire to provide greater liquidity to employee stockholders, to free up cash for investments (the company has spent over $2 billion in the last five years to provide liquidity for stockholders) and to have a publicly traded stock they could use to help finance future acquisitions. SAIC’s current CEO and President, Kenneth C. Dahlberg, noted that in a consolidating defense industry, SAIC is looking to be a consolidator as a means to help fuel continued growth.
The structure of SAIC’s transition to public ownership offers an interesting model for other employee-owned companies that may be contemplating a similar strategy. Prior to the closing of the initial public offering, “Old SAIC” became a wholly-owned subsidiary of “New SAIC”. Shares of Old SAIC were then converted into the right to receive two shares of class A preferred stock of New SAIC.
Prior to the conversion, SAIC declared a special dividend of $15 per share for stockholders of Old SAIC. Proceeds from the IPO were primarily used to pay for the special dividend which had an aggregate value of $2.45 billion. The dividend is indeed “special” since it’s the company’s first dividend in its 37-year history and SAIC has announced that it does not intend to pay a dividend on its publicly traded common stock.
Another interesting feature of the conversion is that the new class A preferred shares have 10 votes each whereas the common stock sold in the IPO has one vote per share in accordance with NYSE rules. As a result, though SAIC sold approximately 20 percent of its total shares outstanding in the IPO, current employees still control approximately 98 percent of the voting power. As employees sell their shares on the market, however, the class A preferred shares will automatically convert to common stock with one vote per share.
Owners of the class A preferred shares are restricted from selling any shares for the first three months following the IPO. At that point preferred shareholders may sell up to 20 percent of their holdings, with additional selling restrictions lapsing in three subsequent 3-month periods so that all shares will be fully liquid 12 months after the completion of the IPO.
Steely-eyed scientists that they are, SAIC was undismayed by the fact that their IPO was scheduled for Friday the 13th! Any lingering doubts that the “animal spirits” of the market were aligned against them were quickly dissipated as the strong demand for SAIC’s stock drove its value from the $15 offering price to $18.18 by the end of the first day, a 21 percent increase. Trading under the symbol “SAI”, a total of 86,250,000 shares, which included the underwriters’ over-allotment option to purchase additional shares, were sold, resulting in net proceeds to SAIC of approximately $1.245 billion. SAIC shares accounted for the largest trading volume for a single NYSE company on its first day of trading, a day which coincided with a new record closing value for the Dow Jones Industrial Average.
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