It's 5 minutes before 5 PM on the last Friday of the month, and the market is going crazy. Hundreds of investors have turned in buy requests. A desperate seller calls from an airport to confirm a transaction. People are rushing around the trading floor to sign paperwork before the market closes.
Another day on the New York Stock Exchange? Not quite. Welcome to the internal market for shares in employee-owned Science Applications International Corp. Based in San Diego, SAIC is a huge company (1996 revenues: $2.2 billion) with a record of innovation in fields from advanced research for the Pentagon to information systems for health care. It recently announced a $700 million plan to acquire Bellcore, the R&D consortium owned by the Baby Bells.
But SAIC's most powerful innovation is its ownership structure. The company's 23,000 people control more than 90% of its stock. As at most high-tech companies, the engineers, programmers, and marketers at SAIC want to share in the value their breakthroughs create. But unlike a Silicon Valley startup, SAIC isn't vulnerable to the vagaries of Wall Street. Share purchases are restricted to the company's employees, consultants, and directors. Trading is restricted to one day per quarter. In a typical year, 2,000 people sell the stock and 3,000 people buy, with an average purchase of $3,000 and an average sale of $15,000.
The internal market has fueled a remarkable performance by SAIC's stock. The share price has increased an average of 19% per year over the last five years; last year alone it rose 34%. As a result, several hundred SAIC employees have become millionaires.
William Scott, an assistant vice president, is one such millionaire. "I invested $500 back in 1970," he says. "It was a big deal because we'd had a child and were buying our first house. But those shares alone are worth $750,000 today. It was the most important financial decision in my life."
Scott Adelson, managing director of investment bank, Houlihan Lokey Howard & Zukin, has worked with SAIC for a decade. "SAIC's internal market is one of the most innovative financial structures I've ever seen," he says.
As with most innovations, SAIC's internal market took shape accidentally. Founder and CEO J. Robert Beyster is a fervent believer in the power of employee ownership. So he offered stock to people who joined the company from the moment it was founded in 1969. Eventually employees asked about liquidity. "More than 300 people owned shares, and we were registered with the SEC," Beyster recalls. "But we were too small for an outside broker-dealer. So we decided to start our own."
That was 1973. Fast-forward to 1997. Beyster's modest innovation has become a phenomenon. Bull Inc. is a registered broker-dealer whose sole purpose is to make a market in SAIC stock. Five of the ten members of the Bull Inc. staff (all SAIC employees) are licensed brokers. "It has its moments, believe me," says Karen Garsson, SAIC's director of stock programs. "Most of the chaos comes from the fact that our stockholders have to hit one deadline each quarter. On the New York Stock Exchange, if you don't buy or sell today you simply do it tomorrow. So much for financial performance. How has SAIC's internal market shaped its business performance? Two effects stand out.
First, it has created an organization of long-term owners. Lots of public companies use an employee stock-ownership plan (ESOP) or stock options to promote rank-and-file equity. But companies rarely tie ESOP grants to performance, which makes them feel more like a retirement program than an incentive. "The impact of this system, where people write checks to buy their stock, is very different from an ESOP," says Garsson. "It's a unique way to gauge and capture the growth of the company."
Second, the internal market allows SAIC to pursue aggressive growth without excessive volatility. Lots of Silicon Valley companies dream about an initial public offering. But IPO rewards are easily dashed by the whims of Wall Street.
SAIC is different. Its board of directors adjusts the stock price using a formula based on net income, shares outstanding, and a "market factor" that compares SAIC with 25 similar companies that are publicly traded. This way, SAIC stock reflects the market without being held hostage by it. In 1987, the year of the crash, the overall stock market fell by 20%; SAIC shares dropped only 5%.
"We're in this for the long term," says Scott. "If you want to get rich quick, start your own company. But if you want to split the difference between the risk of a startup and the security of a big company, this is the place to be."
For more details on SAIC's internal market, contact Karen Garsson (email@example.com) or visit SAIC on the Web, www.saic.com.