Not a scandal but a textbook success

Ross Butler

21 June 2008

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

These gains must be viewed in context: first, the incentive package was more or less standard for a private-equity deal; indeed, it was more equitable than is often the case, since it was offered to all QinetiQ employees. To benefit fully, managers had to achieve a market-standard performance hurdle of 8 per cent compound growth per annum. At the time, that prospect looked remote and many QinetiQ employees failed to take up the offer. The managers effectively had to transform the business: making them put their own cash on the line in return for huge rewards if they perform is a standard private-equity tactic, aligning management incentives with potential rewards for shareholders. The only difference is that in this case it was the government, as majority shareholder, that was the main beneficiary.

But the MPs could not let the subject rest. Chisholm has been accused of manipulating the 2003 sale to line his own pockets — an accusation that anyone who understands the management’s role in a large-scale corporate auction process will find absurd. Chisholm might not be quite the visionary entrepreneur he sees in the mirror, but his success in transforming QinetiQ from a rag-bag of MoD research labs into a highly profitable global business has been met with undue cynicism.

The real issue is that he and the Carlyle Group are guilty of vastly overdelivering — something politicians are so unused to that they assume the assets concerned must have been undersold. And perhaps the government’s need for a scapegoat underscores its embarrassment at having made money off the back of private equity — a sector it has done so much to encourage us to hate over recent years. ‘Carlyle are private equity people,’ said Committee member Austin Mitchell MP. ‘We’re taught not to love private equity in the Labour party.’ It would have been preferable, no doubt, had QinetiQ made an unspectacular lurch on to the public markets and into relative anonymity. No big returns, no millionaires, no need for an inquiry. Next time, that’s probably what will happen.

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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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