The Carlyle Group has spent years attempting to shed its image as a well-connected private equity firm leveraging Washington heavyweights in the defense sector. Instead, it nurtured a reputation as a financially sophisticated asset manager that buys and sells everything from railroads to oil refineries.
The recent disclosures involving National Security Agency surveillance on U.S. citizens by an employee of Booz Allen Hamilton, a Virginia consulting firm that is majority owned by Carlyle, has thrust two of Washington’s most prominent corporate entities uncomfortably into the limelight, bound by the thread of turning government secrets into profits.
Booz Allen employee Edward Snowden was fired Tuesday after he confessed to being the source of stories about NSA data collection programs. Federal investigators are examining how Snowden, who worked at an NSA facility in Hawaii and had also worked for the CIA, was able to gain access to sensitive information.
Carlyle declined to comment.
Booz Allen, based in Tysons Corner, has been a local fixture for years, employing thousands and providing management and consulting services to the government, particularly the defense and intelligence agencies. It even sponsored a local golf tournament — the Booz Allen Classic — between 2004 and 2006.
It also became a leader among the contractors supplying tens of thousands of intelligence analysts to the government in recent years, including technologists such as Snowden.
Those government contracts, and thousands more like them, in 2008 made Booz Allen a ripe acquisition target for Carlyle.
It paid $2.54 billion for Booz Allen as a deep recession took hold. Fearing the risks of taking on too much debt in the midst of a financial crisis, Carlyle put up 50 percent cash instead of its normal 30 percent. It borrowed the rest to buy the company, which was then privately held.
Upon the close of the deal, the less profitable international and commercial business was spun off to become Booz & Co., leaving Carlyle with a government-only company.
After the split, the new Booz Allen Hamilton established an incentive-based compensation structure that gave the remaining partners a stake in the firm’s success. In effect, said one person close to the deal who was not authorized to speak publicly, “you got to eat what you killed.”
The incentives helped spur profits.
“Everybody has a responsibility, depending on your title, to bring in a certain amount of business,” said William Loomis, managing director at financial services firm Stifel Nicolaus.
Booz Allen, which employs 24,500, had a net profit of $219 million on revenue of nearly $5.8 billion for the fiscal year ended March 31. For the same period ending in 2010, the year the company went public, the company earned $25 million on $5.1 billion in revenue.
George A. Price Jr., senior equity research analyst for aerospace, defense and government services at BB&T Capital Markets, said “they’ve got a great brand, they’ve focused over time on hiring top people, including bringing on people who have a lot of senior government experience.”
Carlyle has cashed in on the increased demand of Booz Allen’s services. As profits and revenue have grown, Booz Allen has borrowed money to pay dividends to shareholders, including Carlyle.
Carlyle collected nearly $550 million in dividends in 2009 alone. Last year, Booz Allen issued another special shareholder dividend valued at $765 million — most of which went to Carlyle investors.
Booz Allen went public in 2010, and Carlyle now owns 95.66 million shares — around 69 percent of the total shares outstanding — valued at about $1.66 billion at the current stock price.
As government contracting began to wane, Booz Allen has pursued commercial work and opened an office in Abu Dhabi in the United Arab Emirates. The contractor, for instance, is marketing cybersecurity and other services to Middle Eastern companies and governments.
The moves are at least partly in response to federal budget cutting, which has taken a toll on the business.
“We consider ourselves a well-run company, and in the past year we’ve become even better in managing our business in a difficult market for government contracting,” Booz Allen spokesman James Fisher said.
Price, the analyst, said the company has seen revenue and profit declines more recently. “They’re not immune from the current environment,” he said, adding that the cuts the company has made have “blunted” the effect.
Carlyle may ultimately reap as much as $3 billion on its initial nearly $1 billion investment. In the end, Booz Allen is shaping up to be one of the firm’s biggest home runs.
By Thomas Heath and Marjorie Censer, Published: June 12
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