Carlyle Shows It's Still Tops In Defense

What followed was a classic private equity growth story, one that the government contracting industry in Washington knows well.

Carlyle Managing Director Glenn A. Youngkin, who put together the Qinetiq deal and has sat on the company board since 2003, convinced Qinetiq's managers that the real opportunity was not in the private sector, but in the U.S. government market, where federal agencies were spending hundreds of billions on new technologies for homeland defense and high-tech warfare.

So Qinetiq went on a shopping spree, buying four U.S. companies in three years that do business with defense, intelligence and civilian government agencies here. Its most recent deal was last year's $288 million purchase of McLean systems contractor Apogen Technologies Inc.

The same acquisition strategy has been pursued by other large defense and technology companies, such as fellow British contractor BAE Systems and Falls Church-based General Dynamics Corp., in a buying binge that made dozens of owners of small and mid-size technology contractors rich in recent years.

About $600 million of Qinetiq's $1.5 billion in 2005 revenue came from the U.S. defense market. Carlyle and Qinetiq executives say that the company's U.S. growth, and the growing profitability of its British and European operations, account for what has been a quick and large rise in Qinetiq's value -- from an estimated $870 million when Carlyle acquired its interest three years ago, to around $2.3 billion when shares began trading on Friday.

"The growth story for Qinetiq is a U.S. growth story," Knop said.

Carlyle sold Qinetiq stock worth $281 million in Friday's offering, earning four times its initial investment right off the bat. Further, Carlyle still owns stock worth nearly $300 million. That makes nearly an 800 percent return, a figure that could grow if Qinetiq leverages its U.S. platform wisely.

The British government, through the Ministry of Defense, earned even more.

Yet some members of the British parliament say the Ministry of Defense severely undervalued Qinetiq in the 2003 deal with Carlyle. A former Labor Party defense official, in a television interview this month, likened the deal to post-Soviet-era Russia, where state-owned industries were privatized on the cheap, enriching friends of government officials. The National Audit Office, the British equivalent of the U.S. Government Accountability Office, has said it will investigate.

Youngkin, 39, a former McKinsey & Co. management consultant who joined Carlyle in 1995 -- is not exactly a household name. He runs Carlyle's global industrial investing team out of Washington, though for much of the past five years he has lived in London.

His best-known deal for Carlyle previously was its investment in the Dr Pepper/Seven Up Bottling Group.

Carlyle's long history and expertise in owning defense contractors had as much to do with Qinetiq's rise in value as any market force, company officials say. For example, Qinetiq's biggest U.S. acquisition, Apogen, had Philip A. Odeen as its chairman. Odeen is one of the most successful government contracting executives in Washington. Before he joined Apogen, he ran TRW Inc.'s government operations and was a key player in TRW's $7.8 billion sale to Northrop Grumman Corp. in 2002.

But he is best known for his five-year stint in the mid-1990s as chief executive of BDM International Corp. BDM was one of Carlyle's first and most successful leveraged buyouts, part of a $1.8 billion run of profits Carlyle amassed for investors from 1992 to 2002 in the defense sector.

"If you're going to pick a partner, a strategic financial partner, to build a defense business, it's hard to pick a better one than Carlyle," Knop said.