At SAIC, Owners and Workers See
Eye to Eye
How the largest U.S. private
info-tech outfit reaps the benefits of employee ownership
Thirty years ago, physicist
J. Robert Beyster mortgaged his house and set up shop in tiny offices next door to a
ballet studio in La Jolla, Calif. Beyster and a dozen fellow scientists were struggling to
land Federal contracts in their specialty--nuclear power and nuclear weapons. Then,
inspiration struck. What better way to reward his team than to give away stock in the
company to the researchers who brought in business. By the end of the first year,
Beyster's stake in his company was down to 10%, but survival was no longer an issue.
Today, the 74-year-old founder and CEO owns a scant 1.4% of what is now Science
Applications International Corp. Virtually all of the company's 36,000 employees own a
piece as well, and more than 25,000 of them hold their shares directly, outside the
retirement and profit-sharing programs that invest in the company. That makes SAIC--with
$4.7 billion in revenues and $151 million in net income, up 78% for the year that ended
Jan. 31--the country's largest employee-owned info-tech concern. It also topped BUSINESS
WEEK's list of the leading privately held technology companies.
And SAIC has grown far beyond its roots. Just five years ago, nearly 90% of its revenues
stemmed from U.S. government programs. Now, more than half comes from the commercial
sector. It has built substantial businesses selling plant management and automation
software and services to major oil companies and utilities, and health-care automation
systems to customers such as Kaiser-Permanente, the country's largest HMO.
But its biggest single step into the commercial world came in late 1997 with SAIC's
acquisition of Bell Communications Research (Bellcore), a 1984 Bell Labs spin-off owned by
the regional Bell operating companies. Last year, the company, renamed Telcordia
Technologies Inc., raked in $1.2 billion. Now, the once captive supplier to the Bell
system gets almost half of its revenue from companies other than its previous owner,
thanks to deals with the likes of Sprint. ''It has completely diversified its revenue
base,'' says analyst William D. Rabin of investment bank J.P. Morgan & Co. ''SAIC's
acquisition of Bellcore was a brilliant move.''
Employee ownership has changed the culture at Telcordia. After the takeover, SAIC extended
its stock programs to the new employees, including options and bonus awards and the
ability to buy stock directly from other employees or the company. ''People are taking a
more proprietary interest in the performance of the company,'' says Casimir Skrzypczak,
who heads consulting services at Telcordia. Beyster knows that stock ownership gives
employees a sense of proprietorship that helps get things done. ''We use equity to focus
staff on where we want to grow,'' he says.
SAIC is one of the few employee-owned companies whose stock is liquid. In 1973, Beyster
set up Bull Inc., a wholly owned subsidiary and a registered broker-dealer to provide a
market where employees could buy and sell SAIC stock. The price is set once a quarter
based on the recommendation of an independent appraiser, and employees can buy and sell on
four trading days each year. The company encourages employees to own shares: When
first-time buyers write a check for 25 shares, they get options for 50 more as a bonus.
And as the stock, which last traded at 72 3/8, has soared, so have buyers. Just two years
ago, SAIC saw 3,000 buyers a year. Now, the number is quadruple that.
SAIC's big push into commercial markets has paid off for staffers. After years of a 15% to
20% compound growth rate, it has seen annual returns of 37.5% over the past five years and
53% in the four quarters through April. In part, that's due to an Internet play: Beyster
acquired Network Solutions Inc., which administers domain names on the Internet (the .com,
.net, and .org names). Beyster bought it for $5 million in 1995, took it public in 1997,
and earlier this year grossed $730 million when it sold 4.5 million shares.
Beyster says he would never take SAIC public. The company doesn't need the capital, and
employees already have a way to value their shares. Besides, he bristles at Wall Street's
emphasis on quarterly earnings. ''If an appraiser can value the subsidiary, then we can
reward people commensurate with the value they create,'' he says. ''With NSI, we couldn't
value it, so we let the market do it.''
So, look for SAIC to grow as it always has, acquiring niche players to bolster its skills
in specific areas and setting up joint ventures with overseas giants to get their
business. With a cash hoard now exceeding $1 billion, SAIC won't rule out another big
acquisition or two, Beyster says, especially with companies looking to shed or outsource
their IT operations. ''These acquisitions are always a little scary,'' he says. But not
nearly as much when the employees pitch in to make them work. After all, they're the
ones--and not Wall Street--looking over his shoulder.
By Larry Armstrong in Los Angeles
The Leading Private Info-Tech
Companies
COMPANY LOCATED DESCRIPTION
SAIC San Diego Defense Dept. contractor rings up new
telecom business
ENTEX Rye Brook, N.Y. Technology services company focusing on
INFO SERVICES managing more than
700,000 desktop computers and local-area
networks nationwide
BLOOMBERG New York Cashes in on its ''boxes'' filled with news
and financial data
COMARK Bloomingdale, Resells hardware, software, and peripherals
Ill. and provides services such as Y2K and E-
commerce consulting
BRIDGE INFO New York Provides financial data and news to
SYSTEMS institutional investors,
broker-dealers, corporations, and
governments
DYNCORP Fairfax, Va. Its 16,000 workers provide technology
solutions to the Feds
MARCONI Cleveland, Formerly RELTEC Corp., this firm is a top
COMMUNICATIONS Ohio telecom equipment and
network services supplier
VIEWSONIC Walnut, Calif. Its computer monitors are a window onto
colorful computing
SAS Cary, N.C. CEO of this top data warehousing company
INSTITUTE keeps staffers loyal
via perks such as free day care and
lunchtime piano serenades
PLATINUM Los Angeles Feisty four-year-old specializes in
EQUITY acquiring ailing high-tech
software and service subsidiaries of IT's
biggest companies
SARCOM Columbus, Ohio Will show employees how to use the software
it installs
EL CAMINO Woodland Hills, Computer equipment lessor, systems
RESOURCES Calif. integrator, and IBM mainframe dealer-trader
MODUS MEDIA Westwood, Mass. Software diskette and CD maker
CANDLE Santa Monica, Software company burns at both ends with
Calif. middleware programs for networked computers
ATTACHMATE Bellevue, Software maker helps companies link desktop
Wash. computers to mainframes and tells them how
to manage all those connections
AMS SERVICES Windsor, Conn. Sells back-office software to insurance
agents and companies
LAWSON Minneapolis Challenger to enterprise software giants SAP
and Peoplesoft
SRA Fairfax, Va. Software and systems company is known for
INTERNATIONAL its E-mail screening and content-filtering
software
MEDICAL INFO Westwood, Its software keeps hospitals, physicians'
TECHNOLOGY Mass. offices, and HMOs financially fit
CINCOM Cincinnati Makes software that simplifies business
SYSTEMS processes for manufacturing and finance
companies
1998 REVENUES CHANGE
COMPANY SECTOR (IN MILLIONS) FROM 1997
SAIC Svcs $4,700.0 51.6%
ENTEX Svcs 2,456.0 -1.0
INFO SERVICES
BLOOMBERG Svcs 1,800.0 12.5
COMARK Svcs 1,478.0 38.6
BRIDGE INFO Svcs 1,330.0 212.9
SYSTEMS
DYNCORP Svcs 1,230.0 7.0
MARCONI Tele 1,066.8 20.2
COMMUNICATIONS
VIEWSONIC Comp 941.0 14.3
SAS Svcs 871.0 16.1
INSTITUTE
PLATINUM Soft 700.0 6566.7*
EQUITY
SARCOM Svcs 687.8 87.0
EL CAMINO Comp 678.0 11.7
RESOURCES
MODUS MEDIA Comp 645.7 -5.7
CANDLE Soft 361.0 17.6
ATTACHMATE Soft 300.0 0.0
AMS SERVICES Soft 264.0 20.5
LAWSON Soft 237.8 39.1
SRA Soft 222.7 21.6
INTERNATIONAL
MEDICAL INFO Soft 203.0 85.2
TECHNOLOGY
CINCOM Soft 190.0 9.9
SYSTEMS
*Acquired nine companies
DATA: BUSINESS WEEK, CORPORATE TECHNOLOGY INFORMATION SERVICES
Startups That Could Make It into
the Majors
Sure, lots of promising
candidates are from cyberspace, but don't forget the earthbound
Who are these guys? Perhaps
more than anything, this year's Info Tech 100 shows how tech upstarts can come out of
nowhere to become industry heavyweights. The online auction house eBay Inc. went from an
unknown private company last year to No. 23 on this year's elite list. And it's not the
only one: Inktomi, InfoSpace.com, and Healtheon all went public in the last year and made
it into the ranking. So who's next? Which undiscovered gem might make the list in 2000?
A good place to look is the same spot as the stars of this year's ranking, among the
construction workers of the New Economy. But don't stop there. With each passing year, the
allure of the Net grows stronger, drawing hundreds of millions of new cyberseekers. By
this time in 2000, experts bet that Internet startups will have figured out some of the
head-scratchers: from how to sell tailored clothing to how to deliver ice cream anywhere,
quickly and profitably. And the information-appliance bandwagon may actually pull out,
delivering highfliers with whizzy Web phones and other handheld gizmos.
Some of the most promising upstarts, though, are earthbound. Dozens of candidates are in
the networking and telecom-equipment fields, including Juniper Networks and Avici Systems,
both of which make high-speed routers that threaten Cisco Systems' position as the
dominant supplier of Internet gear.
The real up-and-comer of the bunch may be Cerent Corp. The Petaluma (Calif.) startup lets
phone companies handle voice and data traffic with equipment that's cheaper and
one-quarter the size of existing products. With 60 customers already, Cerent's revenues
are expected to quadruple next year, to $200 million, analysts estimate. ''If you look at
eBay, we say, 'Why can't somebody [become an industry power that quickly] in the equipment
space?''' says Carl Russo, CEO and president.
Still, when it comes to giving companies a fast start, the Web rules. One Net startup,
Webvan Group Inc., is selling groceries over the Web, but that's only part of the story.
Louis H. Borders, the Borders Group co-founder who heads Webvan, has developed logistics
so that Webvan can deliver perishables such as kiwi and live lobsters within a specified
30-minute period. Once the delivery system is in place, the sky is the limit: Along with
groceries, Webvan hopes to deliver your dry cleaning and your newly processed photos. ''If
Webvan cracks this nut, it will reap huge rewards,'' says analyst Evelyn Black Dykema of
Forrester Research Inc.
Another area so promising it's already crowded is the business of Web drugstores. With
backing from Amazon.com, America Online, and Yahoo!, drugstore.com looks like it's headed
for a scorching initial public offering later this year. A lesser known entry is
planetRx.com. The South San Francisco (Calif.) company has attracted $80 million in
funding and recruited William J. Razzouk, a former top America Online Inc. and Federal
Express Corp. executive as its CEO.
Qubit Technology is leading the charge in information appliances. Its first product, due
later this year, is a tablet the size of a sheet of paper that connects with the Internet
wirelessly. With a touch screen, people can navigate the Web while they roam their office
or house. And if your appliance-of-the-future has video, the technology may come from
iCompression Inc. The Santa Clara (Calif.) company designs low-cost chips that are the
brains behind digital video recorders. These are devices that most experts think will soon
be built into millions of TVs, PCs, and other gizmos so you can record, say, a Knicks
playoff game to watch later. ''What Intel is to PCs, iCompression is going to be to
digital video recorders,'' says CEO and President Neal Margulis.
Perhaps the most ambitious private tech company also is one that has been around awhile:
Teledesic LLC, the satellite system backed by wireless pioneer Craig O. McCaw and
Microsoft Corp.'s William H. Gates III. With 288 satellites and a cost that could top $10
billion, Teledesic is supposed to provide lightning-fast Net connections to any point on
earth. With plenty of dough, tech upstarts are making the kind of grand gambits that might
just land them on the Info Tech 100 in 2000.
By Peter Elstrom in New York, with Linda Himelstein and Andy Reinhardt in San Mateo,
Calif.
COMPANY/LOCATION THE SKINNY TELEDESIC Craig McCaw and Bill Gates want the $10 billion satellite Kirkland, Wash. system to deliver the Net to every corner of the globe. WEBVAN With speedy deliveries at precise times, this grocer Foster City, Calif. could grow up to become the FedEx of E-commerce. PLANETRX Forget about schlepping to your local drugstore. This com- So. San Francisco, pany sells prescription drugs and vitamins on the Web. Calif. CERENT It wants to be the next eBay--and could be. In a red-hot Petaluma, Calif. field, its communications equipment is scorching. QUBIT TECHNOLOGY You've heard about information appliances? Here's who's Lakewood, Colo. designing them. ICOMPRESSION It makes the chips that let PCs, TVs, and other things Santa Clara, play you video and audio. Calif.
AOL: Just a Brief Slide
for the Blue Chip of the Net?
America Online's share-price
decline is starting to look worrisome. From its Apr. 6 high of 175, AOL has fallen a
punishing 40%. It closed on June 10 at 106 5/16, a 4% decline from the previous day
brought on by a Merrill Lynch research note that pointed to slower-than-expected
subscriber growth in the June quarter.
This comes on top of the chief concern of AOL investors for the past six months or so --
the company's presumed vulnerability to competition from high-speed cable Internet-access
providers, such as Excite@Home (ATHM). As the blue-chip of the Internet, AOL has stumbled
along with its sector. Fears over rising interest rates, a flood of new Net stocks for
which there may not be enough buyers, and a dearth of positive news in the lull between
quarterly earnings announcements have prompted investors to take profits in high-flying
Web shares.
Wall Street analysts, meanwhile, are pounding the table in an attempt to persuade
investors that the slide is a buying opportunity. "We continue to believe that
investors should not own another Internet stock until they first own AOL," BT Alex.
Brown analyst Shaun Andrikopoulos wrote on June 2. He has a Strong Buy rating on the stock
and has set a 12-month price target of $200.
Morgan Stanley Dean Witter analyst Mary Meeker upgraded the stock to a Strong Buy -- on
May 11, when it was at $128. She argues that fears about broadband are overplayed. She
also admires AOL's powerful branded products on the Web -- Aol.com, Netscape, and ICQ
Instant Messaging. "The revenue and profit generation from these assets is still in
the early days," she wrote.
"Obviously they have a hugely strong brand and a sticky customer base," says
Bill Whyman, an analyst with Legg Mason's Precursor Group. With its 17 million
subscribers, AOL has the kind of mass audience from which E-commerce can ramp up. Nearly
20% of the revenues in its March quarter came from marketing and advertising deals, and
that percentage should grow, analysts think.
"ALL THE MICHAEL JORDANS." For the first quarter of 1999, AOL reported
net income of $420 million, or 41 cents a share, on revenues of $1.25 billion. That
represents a burst from 1998, when revenues were $2.6 billion for the full year -- and net
income was $92 million, or 11 cents a share. Analysts expect AOL's earnings to grow by 50%
a year long term, and indeed the company ranks first in the Business Week InfoTech 100. That ranking
factors in return on equity, revenue growth, total revenues, and total return to
shareholders.
Another strong positive for long-term investors: AOL's increasingly high-powered and
confident executive team. "We're quite aggressive in recruiting the best minds in the
world," says Stephen M. Case, chairman and CEO of America Online. "We want all
the Michael Jordans working for AOL."
As bullish as analysts are long term, they concede that they're keeping an eye on several
challenges facing AOL. AOL's slower overall subscriber growth is due to anemic growth
overseas, especially in the Britain, where consumers can opt for free access (See "AOL Abroad: 'I Claim This
Land...Whoops!'" BW--June 14, 1999). AOL will have to come up with a strategy to
compete against free access. "It's not a tear-your-hair-out concern, but something we
have to watch," says Abhishek Gami, an analyst with investment bank William Blair.
Pricing models for Internet access in the U.S., where some companies are offering free PCs
for customers who pay for Net service, could also be a challenge, notes Merrill Lynch
analyst Henry Blodget. "We believe it may change or threaten the existing access
business, where AOL is the leader," he wrote in a June 7 research note. Even so, he
credits AOL with adapting to new pricing models, such as when it switched to flat-rate
pricing three years ago. So he predicts that AOL will be able to react to the change and
maintains his Buy rating on AOL stock.
CABLE-ACCESS THREAT. While AOL's subscriber growth rate has slowed from early this
year, so has that of competitors, notes Gami, who points out that Internet adoption
typically slows when the weather gets better. Year-over-year, subscriber growth is up from
this time last year. He expects AOL's financial results for the quarter ended in June to
be strong, since the company didn't spend as much on marketing during the quarter.
Still lurking is the threat that AOL will lose customers to high-speed cable access. A
positive for AOL was a June 4 Federal court ruling that AT&T (T), which stood to
restrict Internet service providers from using its cable lines to offer high-speed access,
will have to make them available. But AT&T is sure to appeal. In the meantime, AOL has
a plan to offer high-speed access over phone lines. But investors are still waiting for
its cable strategy.
AOL also needs to prove it can make a success out of its Netscape acquisition, which
included a side deal with Sun Microsystems (SUNW). Part of that entails selling complete
E-commerce solutions to other businesses, a departure from AOL's focus on consumers.
"How they build out a business-to-business E-commerce software side is still unclear
to me," says Whyman. AOL also has to implement its "AOL Anywhere" strategy
for providing access to its service via handheld and other devices that use Sun's Java
programming language.
At some point, the company's valuation will have to come in line with that of other
technology companies -- but not yet, says Gami. AOL's price-earnings ratio figured on his
estimates for 2000 earnings is still above 200. "We always give a premium valuation
to AOL," says Gami. "Like Microsoft, AOL is never cheap." But it's too
early to value the company based on its earnings, says Gami who thinks long-term investors
are better served if AOL spends now to grow.
For now, AOL has a business model that works, and that is what long-term investors should
focus on, say analysts. AOL is facing challenges but has proven it can be flexible and
adapt to change. "We think it's a marathon, not a sprint," says Case. In that
light, the recent stock swoon may just be AOL catching its breath.
By Amey Stone in New York with Cathy Yang in Washington