SAIC (UNKNOWN:SAI.DL) has struggled in recent years, with SAIC stock having posted sharp declines in 2011 and 2012 in response to adverse conditions among companies relying on the federal government for substantial portions of their business. But so far this year, SAIC has posted a fairly impressive rebound, due in part to the company's plans to break up its business and create two separately traded companies with different business focuses.
SAIC has earned a solid reputation in the cyber-security industry, benefiting from the rise in Internet- and network-based attacks on computer systems and other technology. But its strategic move to split itself in two would create a smaller government-services company and a larger technology-based company to be called Leidos. Let's take a closer look at SAIC and what's likely to result from its move.
What SAIC does and how it's doing
The rise in technology has created huge gains in productivity in both the public and private sectors, but along with those opportunities has come the challenge of dealing with the increasing vulnerability that technology has brought. With cyber-attacks having risen sharply in recent years and allegations of state-sponsored hacker groups in North Korea and China, the value of protection against those attacks has greatly enhanced the visibility of SAIC's cyber-security efforts.
But given how much business SAIC does with the government, recent budget cuts under sequestration have hampered the company's growth. In its most recent quarter, SAIC suffered a 31% decline in earnings from the previous year, missing expectations on both sales and net income. Automatic spending cuts only added to federal-budget pressures that companies throughout the sector have had to endure for years now.
Breaking up is smart to do
Arguably the biggest benefits of the split will be to accentuate the diverse services that SAIC currently provides. Cyber-security is all the rage and is clearly a growth industry, but it's far from the only thing that the company does. SAIC and Raytheon are working on drones that could help the U.S. detect enemy submarines much more cost-effectively than by using manned anti-submarine detection methods. Moreover, the company recently showed off its AD16 data link technology, which helps command posts gather vital information to help guide strategic decisions on the battlefield.
Meanwhile, giving its cyber-security and information technology segment a chance to become independent should help SAIC compete better against the many rivals that are looking to stake their claim to the rapidly growing industry. General Electric (NYSE:GE), for instance, has a substantial presence in providing military-grade networking equipment and protective measures including customized firewalls, encryption software, and other products to help secure military communications from hackers and other outside threats. GE has extended and adapted those efforts to commercial applications through its GE Information Security Technology Center as the need has become greater throughout the private sector, and having SAIC streamlined to hold its own against GE and other rivals should help bolster both SAIC stock and that of its Leidos spinoff in the future.
What's next for SAIC?
So far, SAIC has been moving slowly but steadily in its breakup moves, agreeing last month to sell its headquarters and hiring an executive to lead its national-security division within Leidos. The company is dealing with other costs from the restructuring, including professional fees and further costs of reducing its real-estate holdings and moving some of its employees.
For SAIC stock, the impact of the split will depend greatly on decisions that investors make after the two companies trade independently. If budget concerns continue, then the government-facing half of the company might well underperform the broader-based business, rewarding those who decide to sell off their SAIC stock and hang onto shares of Leidos that they obtain in the split.
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Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of General Electric and Raytheon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.