If a certain investing strategy delivers returns then you can count on followers and imitators joining the party. Just
google ‘how to invest like buffett’. Even this site is an offshoot of Joel Greenblatt’s successful investment strategy. Corporate strategy is the same, especially in the minds of analysts in the investing world - if an idea worked for one company then every company in the industry should pursue it. Spinoffs are no exception to that rule and the next industry in the ‘new idea’ queue is defense.
The headwinds facing the defense industry are well known. A rapidly shrinking federal budget for defense coupled with the ending of two wars is not good for business and the defense industry will need to adapt. One approach gaining favor is the separation of select units with poor fundamentals. L-3 (LLL) accomplished this earlier this year by separating its government focused unit, Engility (EGL) and even Northrop Grumman’s (NOC) separation of its shipyard Huntington Ingalls (HII) could fall into this category. It was only a matter of time until the next one lined up and now Scientific Applications International Corporation (SAIC) announced that after completing a strategic review, it too will pursue a spinoff, thereby splitting itself into two independent units, a technical services business and a solutions business.
The technical services business will focus on “on government technical services and enterprise IT businesses,” and become one of the “largest, pure-play government services companies in the market.” This unit has pro forma FYE Jan 31, 2013 revenues of $4b. The solutions-focused business will focus on “delivering science and technology solutions in three high-growth markets that reflect high priority, long-term global needs – national security, engineering and health.” This unit has pro forma FYE Jan 31, 2013 revenues of $7b.
A slightly more detailed look at the transaction can be found within this short company presentation. According to John Jumper, SAIC’s chairman and CEO, the “two new companies will be designed so that their businesses can be more differentiated and more competitive in their own space.” These won’t just be two differentiated companies, but two companies with growth potential as “the burden of organizational conflicts of interest (OCI)” is eliminated. Real exciting. That sounds very similar to L-3′s logic and although it is still early to form a fully informed opinion, it feels like SAIC is trying to accomplish exactly what L-3 did with its spinoff. Separate the slow growth, severe headwinds-facing parts of its business under the guise of removing internal conflicts. Perhaps easing those conflicts can lead to a sudden influx of new business, but even so it will likely be hard-fought new business.
As has often been the case, the market reacted quite positively to the news and the stock was up over 7% at one point before coming back down a bit. The spin is expected to be completed next year in a tax-free transaction with both companies eventually trading on the NYSE. We will keep you updated as more information is released.
Disclosure: Author holds no position in any stock mentioned.
- SAIC (SAI) Moves Higher as Plan to Split Could Unleash Growth (streetinsider.com)
- Engility Spinoff A Go! (stockspinoffs.com)
- SAIC to split into two separate companies (marketwatch.com)
- SAIC announces spin-off plan (knoxnews.com)
- SAIC to split into two companies (virginiabusiness.com)