Team Infidel
Forum Spin Doctor
Wall Street Journal
May 17, 2008
Pg. 1
By August Cole, Peter Lattman and Joann S. Lublin
WASHINGTON -- Two of the capital's best-connected companies have reached a $2.54 billion deal that showcases the lucrative market for carrying out sensitive military and intelligence work on behalf of the federal government.
The Carlyle Group, whose roster of advisers once included former President George H.W. Bush, is buying a majority stake in the U.S. government business of Booz Allen Hamilton Inc. With its deep ties to the defense establishment -- the director of national intelligence is a former executive -- Booz Allen has become embedded in a wide range of military operations such as planning wargames.
The U.S. government has become increasingly reliant on outsourcing in defense. An army of contractors has sprouted in suburban Washington, D.C., to design computer networks and perform other sophisticated work.
During the private-equity boom that has cooled recently, Carlyle often made news by buying well-known companies such as Dunkin' Brands Inc. and Hertz Corp. The Booz Allen deal brings Carlyle back to its roots as a defense-centered company.
In the late 1980s, Carlyle appointed former Defense Secretary Frank Carlucci as chairman and made many successful defense investments. It faced intense scrutiny earlier this decade for its close government ties and de-emphasized defense work. The Booz Allen deal is its first pure defense acquisition in a decade.
Booz Allen is better known as a management consultant to big companies. But under Chief Executive Ralph Shrader, its government arm -- with $3.5 billion a year in revenue -- has grown bigger than the main consulting operation. Booz Allen's global commercial consulting business will be split into a separate entity.
Mr. Shrader will remain in his current role on the government side of the business. Carlyle will be represented on Booz Allen's board, but will have no operational role. According to people familiar with the matter, the commercial consulting business, which has about $1.3 billion in revenue, will continue to be run by London-based Shumeet Banerji.
"We intend to continue to operate the government business exactly as we've operated this business for the last 15 years that I've been in charge," said Mr. Shrader in an interview.
That guarantee is critical because the government has come to rely on Booz Allen with some of its most-sensitive national-security work. Its sales are small relative to the $42 billion in annual revenue posted by top contractor Lockheed Martin Corp., but Booz Allen is often at the nerve center of the defense bureaucracy.
Instead of making planes, ships or bombs, Booz Allen consultants are heavily involved in managing Air Force satellite programs and engineering the structure of the still-young Department of Homeland Security.
Another key role is helping the Pentagon manage multibillion-dollar defense contracts. Because of mergers of U.S. defense companies during the 1990s, fewer defense firms are competing for the same contracts. Meanwhile, the government's contracting experts are in short supply because of downsizing. Booz Allen and other companies fill in the gaps in program-management expertise.
Booz Allen's defense business was built with a roster of former high-ranking U.S. intelligence and military officials. Among the firm's "super luminaries," as they're known in the consulting industry, are James Woolsey, a former director of the Central Intelligence Agency. The current director of national intelligence, Mike McConnell, is also a former Booz Allen executive.
"When I looked around and talked to people, Booz Allen had a reputation for doing quality work and high-integrity, high-quality people," said former Air Force Gen. Tom Moorman, who recently retired after playing a key role in Booz Allen's Air Force and space contracts.
Surging demand after the Sept. 11, 2001, terror attacks lifted Booz Allen. "We took what had been 14% to 15% growth and all of the sudden we're growing in excess of 20%," said Mr. Shrader in a recent interview before Friday's deal announcement. "But we wouldn't have been able to do that if we hadn't already had the trajectory and the momentum."
While Carlyle had been tracking the firm for over a year, the acquisition is a departure. Over more than two decades, Carlyle has built up about $81 billion in assets under management across virtually every industry and geography. Former British Prime Minister John Major and former U.S. Secretary of State James Baker have been on its payroll.
Nowadays, Carlyle is likely to strike business deals with foreign governments as it is with the United States. On Wednesday Carlyle announced a deal with the government of Shandong province in China that will give the firm a first look at deals in the region. Carlyle also has a major investment from Abu Dhabi fund Mubadala Development Co., which bought a 7.5% stake in the Carlyle for $1.35 billion.
In the immediate aftermath of 9/11, Carlyle came under fire for its relationship with Osama bin Laden's family, which had been an investor in Carlyle funds. Facing concern that the family would profit from the war on terrorism, the family and Carlyle quickly ended their financial ties. Nevertheless, Carlyle conspiracy theories abounded and were aggressively advanced by filmmaker Michael Moore in his popular documentary "Fahrenheit 9/11."
In 2003 the firm brought in former International Business Machines Corp. chief executive Louis Gerstner as its chairman. Since then, it has aggressively hired high-profile former business executives from an array of industries, including Douglas "Sandy" Warner, the former chief executive of J.P. Morgan Chase & Co., and Daniel Akerson, the former chief executive of Nextel Communications Inc.
Its aerospace and defense unit still boasts noted names such as John Jumper, the former top Air Force official and a member of the Joint Chiefs of Staff under President Bush. Existing holdings include aerospace contractor Vought Aircraft Industries Inc.
Splitting up Booz Allen helps resolve a longstanding, and often tense, internal debate over the company's structure. A few years ago, the company tried to speed up integration of the commercial and government-contracting sides of the company. That didn't work and led, in part, to the decision to sell the government side to Carlyle.
Booz Allen's defense and corporate consulting businesses are vastly different. The ratio of managers to staff consultants on government projects can be as high as one to 100, while the corporate consultants deploy in small teams for shorter assignments that are measured in weeks, not years. These differences, and others including the laborious security clearance process needed for the government work, influenced the decision to split up the company.
"These two businesses have really grown up under completely different models," said Mr. Shrader.
Booz's commercial business is expected to unveil its new name next Wednesday. The U.S. government business will still be called Booz Allen Hamilton while the remaining commercial business will be named Booz & Co., according to people familiar with the situation.
May 17, 2008
Pg. 1
By August Cole, Peter Lattman and Joann S. Lublin
WASHINGTON -- Two of the capital's best-connected companies have reached a $2.54 billion deal that showcases the lucrative market for carrying out sensitive military and intelligence work on behalf of the federal government.
The Carlyle Group, whose roster of advisers once included former President George H.W. Bush, is buying a majority stake in the U.S. government business of Booz Allen Hamilton Inc. With its deep ties to the defense establishment -- the director of national intelligence is a former executive -- Booz Allen has become embedded in a wide range of military operations such as planning wargames.
The U.S. government has become increasingly reliant on outsourcing in defense. An army of contractors has sprouted in suburban Washington, D.C., to design computer networks and perform other sophisticated work.
During the private-equity boom that has cooled recently, Carlyle often made news by buying well-known companies such as Dunkin' Brands Inc. and Hertz Corp. The Booz Allen deal brings Carlyle back to its roots as a defense-centered company.
In the late 1980s, Carlyle appointed former Defense Secretary Frank Carlucci as chairman and made many successful defense investments. It faced intense scrutiny earlier this decade for its close government ties and de-emphasized defense work. The Booz Allen deal is its first pure defense acquisition in a decade.
Booz Allen is better known as a management consultant to big companies. But under Chief Executive Ralph Shrader, its government arm -- with $3.5 billion a year in revenue -- has grown bigger than the main consulting operation. Booz Allen's global commercial consulting business will be split into a separate entity.
Mr. Shrader will remain in his current role on the government side of the business. Carlyle will be represented on Booz Allen's board, but will have no operational role. According to people familiar with the matter, the commercial consulting business, which has about $1.3 billion in revenue, will continue to be run by London-based Shumeet Banerji.
"We intend to continue to operate the government business exactly as we've operated this business for the last 15 years that I've been in charge," said Mr. Shrader in an interview.
That guarantee is critical because the government has come to rely on Booz Allen with some of its most-sensitive national-security work. Its sales are small relative to the $42 billion in annual revenue posted by top contractor Lockheed Martin Corp., but Booz Allen is often at the nerve center of the defense bureaucracy.
Instead of making planes, ships or bombs, Booz Allen consultants are heavily involved in managing Air Force satellite programs and engineering the structure of the still-young Department of Homeland Security.
Another key role is helping the Pentagon manage multibillion-dollar defense contracts. Because of mergers of U.S. defense companies during the 1990s, fewer defense firms are competing for the same contracts. Meanwhile, the government's contracting experts are in short supply because of downsizing. Booz Allen and other companies fill in the gaps in program-management expertise.
Booz Allen's defense business was built with a roster of former high-ranking U.S. intelligence and military officials. Among the firm's "super luminaries," as they're known in the consulting industry, are James Woolsey, a former director of the Central Intelligence Agency. The current director of national intelligence, Mike McConnell, is also a former Booz Allen executive.
"When I looked around and talked to people, Booz Allen had a reputation for doing quality work and high-integrity, high-quality people," said former Air Force Gen. Tom Moorman, who recently retired after playing a key role in Booz Allen's Air Force and space contracts.
Surging demand after the Sept. 11, 2001, terror attacks lifted Booz Allen. "We took what had been 14% to 15% growth and all of the sudden we're growing in excess of 20%," said Mr. Shrader in a recent interview before Friday's deal announcement. "But we wouldn't have been able to do that if we hadn't already had the trajectory and the momentum."
While Carlyle had been tracking the firm for over a year, the acquisition is a departure. Over more than two decades, Carlyle has built up about $81 billion in assets under management across virtually every industry and geography. Former British Prime Minister John Major and former U.S. Secretary of State James Baker have been on its payroll.
Nowadays, Carlyle is likely to strike business deals with foreign governments as it is with the United States. On Wednesday Carlyle announced a deal with the government of Shandong province in China that will give the firm a first look at deals in the region. Carlyle also has a major investment from Abu Dhabi fund Mubadala Development Co., which bought a 7.5% stake in the Carlyle for $1.35 billion.
In the immediate aftermath of 9/11, Carlyle came under fire for its relationship with Osama bin Laden's family, which had been an investor in Carlyle funds. Facing concern that the family would profit from the war on terrorism, the family and Carlyle quickly ended their financial ties. Nevertheless, Carlyle conspiracy theories abounded and were aggressively advanced by filmmaker Michael Moore in his popular documentary "Fahrenheit 9/11."
In 2003 the firm brought in former International Business Machines Corp. chief executive Louis Gerstner as its chairman. Since then, it has aggressively hired high-profile former business executives from an array of industries, including Douglas "Sandy" Warner, the former chief executive of J.P. Morgan Chase & Co., and Daniel Akerson, the former chief executive of Nextel Communications Inc.
Its aerospace and defense unit still boasts noted names such as John Jumper, the former top Air Force official and a member of the Joint Chiefs of Staff under President Bush. Existing holdings include aerospace contractor Vought Aircraft Industries Inc.
Splitting up Booz Allen helps resolve a longstanding, and often tense, internal debate over the company's structure. A few years ago, the company tried to speed up integration of the commercial and government-contracting sides of the company. That didn't work and led, in part, to the decision to sell the government side to Carlyle.
Booz Allen's defense and corporate consulting businesses are vastly different. The ratio of managers to staff consultants on government projects can be as high as one to 100, while the corporate consultants deploy in small teams for shorter assignments that are measured in weeks, not years. These differences, and others including the laborious security clearance process needed for the government work, influenced the decision to split up the company.
"These two businesses have really grown up under completely different models," said Mr. Shrader.
Booz's commercial business is expected to unveil its new name next Wednesday. The U.S. government business will still be called Booz Allen Hamilton while the remaining commercial business will be named Booz & Co., according to people familiar with the situation.