Anthony Moraco (Rob Curtis/Staff)
WASHINGTON — SAIC, the world’s 12th largest defense contractor, will be dividing into two similarly sized companies this month, with its government services division keeping the SAIC name. The company announced that its board had approved the split on Monday, set to become official after the markets close Sept. 27.
Anthony Moraco, currently the head of SAIC Government Solutions Group, will be at the helm of the SAIC segment as the company starts its new life. His post comes with a host of challenges, from a shrinking defense budget to pressure on margins for services providers.
Ahead of a planned meeting with market analysts Wednesday to discuss the new company, Moraco said he is optimistic about the contractor’s chances and sees opportunity despite the challenges.
Q. It’s become something of a trend for defense contractors to separate services divisions in the past couple of years. What’s the business case for the split, and how do you think it improves opportunity for the division?
A. We considered many options, from holding companies to selling off pieces of the business, divesting. We have seen some of that portfolio-shaping in other companies, some with other spins we have seen in similar fashion. So we looked at that and said for our value creation, as well as protecting the shareholder value based on taxes and all the mechanics of the separations of the sales, base spin was the most advantageous.
So value-creation was the driving force. OCI [organizational conflict of interest] played a role in it, but ultimately, we are able to create two great companies at $6 billion and $4 billion-ish that allow us to continue to serve the customers we have for the last four years and do it in a way that is more productive for both.
Q. The margins for services contractors have been squeezed by an increase in competition as the Defense Department tries to find ways to save money. How do you think you’ll be able to differentiate yourselves, and do you still think it’s still a good bet to be in defense?
A. We are focused on the service business with those opportunities in the defense business that we have. So of the $4 billion, about three-quarters of our business is with the Defense Department. But at the same time, there are plenty of opportunities to service this customer base, as well as the federal space that represents the other part.
Our biggest advantage is that scale, and this is now at $4 billion as a new company, a 44-year history and a great portfolio in those two dimensions give us the ability, we think, to provide end-to-end services to our customers.
Q. One of the big debates right now is whether contractors should be cut out to save money for DoD personnel. Do you see that happening, and how do you make the case for the continued role of contracting personnel?
A. I think it comes down to the nature of what the contractors are providing. The subject-matter experts in the disciplines in weapons engineering, space systems, missile defense, are not always organic to the US government.
So I think that partnership is one that is hard to undo. I think we have made movements, and we have seen those movements. There are cycles. Probably three or four years ago, we probably saw a much more aggressive in-sourcing to the government activity or converting contracts to government employees. That stopped as the budget constraints started playing up. We saw some stability.
Q. Where do you fit in, as part of helping DoD find more efficient ways to spend its money and as part of the organization?
A. As we have seen contract consolidations, SAIC can be that prime contractor for the government. Over 90 percent of our current contracts in the new company will be prime contracts. So you have a very strong customer presence through the contract office based on the prime access and the subsequent suppliers with variant sites to the supply chain that sits under that.
The advantage we have, of our staff of 14,000, two-thirds are resident and work every day with the customer. So we only house one-third of our staff in facility, so that keeps our indirect cost down so we can work on that side.
So the upside is that two-thirds are working every day and, not only are they supporting the mission on the technical side, but they are also using the infrastructure with the [chief information officer’s] delivery on the enterprise IT [information technology] side. So we get direct insight.
Q. That helps you keep company costs and overhead down, which is one of the benefits that small businesses bring to the table. How do you think you can remain competitive with companies pushing to undercut price?
A. The track record, the performance, and I think, as we look at transition and really fundamental risk management, and help the customers manage that. As you know, there is sure a lot of advocacy for small business. We are a large small-business advocate, as well. But at the same time, I think there is a balance of what large companies can, in fact, do, perhaps better — whether we can leverage our balance sheet, which we can also use as a differentiator. How we would model an acquisition — we use it in some of our engineering business.
Q. Dividends have been a big draw for investors in defense companies. Do you imagine that you’ll continue the push to issue large dividends, and how does that play into attracting investors?
A. We will honor our dividend. Both companies would initially agree to, and their respective value side once it splits, to still go forward with that 12 cents as it exists today, traditional value divvied up based on share accounts but with the same inherent intrinsic value.
Our go-to market is one of, I think, a fairly disciplined approach to capital employment, a dividend, and making sure that we have opportunities as the market presents itself. But at the same time, it is going to be steady cash flow, return that to the shareholders. Reinvest a portion of that, obviously, and make sure we can grow where we can.
But it is not necessarily a top-line growth story. The budgets are there, but we can increase our margins and have, I think, a very high value, from an investment perspective, property that is going to be attractive to folks.
Q. The other area with big growth is share repurchases as companies return cash to shareholders. Is that important to the new company?
A. I think it is a model that is attractive to the investors, particularly in a recognized flat market. So continuing that is valid. The share repurchases is a good mechanism to return that value fairly quickly — more quickly perhaps than [mergers and acquisitions]. So I think that is the dynamic of show me a return, give me confidence that I should stay in the game. And what I would expect is, given what we can show in performance, that we can be at pace and outperform our peers.
So I think there will still be investors who will not entirely exit the aerospace and defense sector. They are going to take a look at the IT sector collectively. And so how we position in those two domains is something to work on.
Q. What do you think the strategy will be when it comes to mergers and acquisition?
A. Really to fill gaps of where you would want to go. We will look at market access. I think in our case in this segment, market access translates to contract vehicles and so you can see some of the consolidation driven by who owns what contract vehicles.
Q. There’s been a lot of discussion about how DoD can find ways to cut the cost of the acquisition process, both for the agency and for contractors. What do you think the agency can do to cut costs?
A. The fundamental thing that the government can help the process along with is just some fundamental decision-making that can be very tactical as part of the acquisition process. But not so much the churn, but the pent-up submitted bids waiting award, contract vehicles that are in second-, third-year bridges, extensions, just the amount of money that goes into the bidding process. If we are spending too much on [bids and proposals] because we have to re-compete everything or re-compete it three times or re-compete an IDIQ [indefinite-delivery, indefinite-quantity contract] and then compete with five other multiple awards.
IDIQ is a great vehicle. It gives them flexibility. The purpose is to pre-select a stable of suppliers to do a certain scope of work. Great idea. But when you award it to everybody that bids, if there are 10 multiple award solution providers, then you have not necked down the market. Everybody is still in, everybody is on a team, and you have not improved your ability to pick the best performer.
What happens is in every task order, you have to now evaluate 10 task order bids, not two.
Q. One of the areas that seems to drive cost growth is change orders. How can DoD cut the number of changes to save money?
A. The short answer is just more of a dialogue. There are so many constraints on when and how you can talk to the customer pre-RFP [request for proposal]. And what you really want, you cannot ask. There are the blackout periods that RFPs cannot talk to anybody. The government shuts down. There are constant protests. They are averse to making any kind of decision, they have got to make sure everything is covered. But we have lost some of the, I want to say, collaboration of the dialogue between what the customer truly needs, the contractor’s ability to ask questions.