Booz Allen Units to Part Ways

Booz's Ralph Shrader said employees
Booz's Ralph Shrader said employees "will see no changes." (Adam Berry - Bloomberg News)
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By Zachary A. Goldfarb
Washington Post Staff Writer
Saturday, May 17, 2008

The consulting firm Booz Allen Hamilton said yesterday it is splitting up, selling its U.S. government business to private-equity firm Carlyle Group for $2.54 billion and spinning off its commercial business into a separate company.

The deal pairs two of the largest private companies in the region. Booz Allen, based in McLean, has 13,000 local employees and is one of the government's largest providers of services. Carlyle, based in the District, has $81.1 billion under management and is one of the largest private-equity firms in the world.

The move is the culmination of more than two years of soul-searching at Booz Allen, which has struggled to reconcile the diverging paths of its units. The government unit's business surged after the post-Sept. 11 boom in government spending. The commercial unit, however, has failed to keep pace. That has created tensions between the units and amplified differences between their cultures, management and clients.

The deal, financed partly by debt, was seen as a sign of improvement in the credit markets, at least for certain deals, after the tightness of the past year. It was possibly the largest buyout of a government contractor ever, and Carlyle's biggest since its $6.3 billion bid to buy Manor Care in August. Despite the deal's size, participants said the agreement did not necessarily mean the industry would see other acquisitions soon.

Carlyle is well-known for buying firms, shaking up their operations to spark growth and selling them, but company officials said it has no plans to revamp Booz Allen.

"Continuing to operate their business as they have will generate a level of growth that will get us the increase in value we're hoping to achieve," said Peter Clare, a Carlyle managing director who oversees the firm's defense, aerospace and government services portfolio.

Carlyle, as a majority owner, will be in a position to advise Booz Allen on what markets to enter and can provide capital if Booz Allen pursues acquisitions, Clare said.

"This was opportunity-driven. This is our ninth investment in a government services firm, so this isn't a sea change for us," Clare said. "I think our focus in our transactions is ultimately on the sectors of government services that we find most attractive -- [information technology], security, intelligence."

Ralph W. Shrader, Booz Allen's chairman and chief executive, said employees had no reason to be fazed by the announcement: "My message to the staff is, 'You will see no changes.' "

Shrader, who had planned to retire next year, will stay indefinitely to run the newly constituted government business.

Analysts said they expected Carlyle and Booz Allen to try to bring the company public in a few years, but Shrader and Clare both said it was too early to know if and when that might happen.

John Allen, co-head of the defense and government services group at Reston's BB&T/Windsor Group, said the Booz Allen deal is the latest and highest-profile of a string of smaller private-equity deals in recent years. Chief among them: New York-based Veritas Capital bought Falls Church contractor DynCorp for $850 million in 2005.


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