Not a scandal but a textbook success

21 June 2008

Ross Butler says MPs’ criticisms of the sell-off of theformer Defence Research Agency are financially naive

That change in QinetiQ’s profile boosted its value to more than £1.3 billion at flotation, making the stake retained by the government worth £800 million. But the National Audit Office was concerned that more money might have been raised from the 2003 sale to Carlyle. The reasoning smacks of hindsight, and misses the vital point that QinetiQ found a private equity partner capable of taking the company towards success. Since the government remained the majority shareholder after the Carlyle deal, extracting the highest possible price at that stage to the exclusion of future growth considerations would have been shortsighted. As a result of Carlyle’s investment, QinetiQ is a fundamentally different business, and today’s valuation bears no relation to that of its pre-Carlyle era.

Two other findings from the National Audit Office inquiry stuck in the Committee’s throat. The first is that Carlyle reduced its offer price after being offered an ‘exclusive’ negotiating position in the 2003 auction. Whether Carlyle’s late price reduction — relating to pensions liabilities and an unsigned supplier agreement — could have been resisted is unclear, although one suspects that UBS investment bankers are not pushovers. What is clear is such hardball tactics are part of everyday life in the world of corporate deals. In attempting to second-guess decisions made in the thick of intense negotiations, the Committee has proven itself the real innocent. But the aspect of the privatisation that the MPs found hardest to stomach was the sheer amount of money made by senior management. By any normal standards, it is astonishing: the top ten managers invested £540,000 between them in 2003; it turned into £107 million at the flotation in 2006.

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Cogito Ergosum

June 19th, 2008 4:39pm Report this comment

If the Governement feels it got too little from the deal, that merely matches their disdain for the scientific skills which propelled the company.

If they really valued scientists and engineers, they would have kept ownership of the company.

Peter Sugar

June 20th, 2008 2:58am Report this comment

You are forgetting the large single tender government contract handed down by government for the management of the ranges, just prior to flotation.
You are also forgetting the enormous amount of land that the government allowed QinetiQ to keep and which they sold for cash to fund the purchase of those companies in the USA.
The chairman and people who profiteered did not work for that but were handed all of that on a plate. How could the valuation of the business had been so low escapes everyone and it stinks to high heaven.
The numbers look unbelievable whatever you say about context. The business of this firm today is what it always was a handout from government (UK or US) and the patents and elite scientists they inherited meant that they could not fail. The firm is not as robust as you are describing it for otherwise the share value would be much higher than at flotation prices.

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