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Thursday 4 December 2008

Not a scandal but a textbook success

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

Yet, in reality, the QinetiQ’s story has been a textbook example of smart privatisation. It was initially spun out of what had by then become the Defence Evaluation & Research Agency in July 2001. The intention was to seek an immediate public listing, but the stock market was unfavourable and the government’s defence research budget, on which the company would clearly depend for years to come, was shrinking. Instead, it was decided to bring in a commercial investor-partner prior to seeking flotation when both company and market were ready.

The decision by MoD officials not to sit on their hands until the stock market revived has received strong criticism from the Committee, displaying remarkable naivety about commercial realities. Furthermore, the Committee has compounded the fiction that Carlyle was handed its 33.8 per cent stake for a song, guaranteeing it an exceptional return when the company eventually did come to market. In reality, a fierce auction among 40 interested parties, managed by UBS, was narrowed to 12 bids, resulting in the Carlyle Group paying £42.2 million for its stake. Most of the underbidders were seasoned players in the competitive world of private equity. I spoke to several at the time, and gathered that their highest realistic growth trajectories and future valuations were not sufficient to make the numbers work. This was no silver-platter gift.

So how could Carlyle make eight times its money when QinetiQ was floated three years later, in February 2006? At the time of the auction, with prospects for MoD work fading, QinetiQ’s managers had vague plans to diversify into fields such as healthcare. But Carlyle encouraged them not to divert from their core expertise but instead to expand into other areas of the defence market and establish joint ventures with larger firms such as Thales and BAE Systems. Carlyle also encouraged (and no doubt opened doors for) the company to launch into the world’s largest defence market, the US. During the period of Carlyle’s involvement, QinetiQ acquired four US defence companies and built up its US revenues from zero to more than $600 million.

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