Booz Allen Units to Part Ways

"I certainly see it as a continuation of that movement," he said.

But John Hamre, president of the Center for Strategic and International Studies and a former senior Pentagon official, said he does not expect many more deals after years of rising valuations following the post-Sept. 11 boom.

"It's harder to find a good buy in the defense industry," Hamre said. "There's also unease in the investment community about, 'How long does this investment bonanza continue?' "

The deal, which must still be approved by Booz Allen's partners and government regulators, is slated to close by the end of the year. Booz Allen's board will consist of several Carlyle representatives, Booz Allen partners and outsiders.

As for Booz Allen's commercial business, it is preparing to announce a new name and plans for its management, said spokesman Michael Bulger. The two new firms have an agreement to work together. But diverging fortunes and cultures are at the heart of the split.

The government unit works with the National Security Agency, Food and Drug Administration, and countless other government agencies. It recruits a broad range of people, including recent college graduates, veterans and engineers. Teams working on government contracts can include 100 or more people.

The commercial unit, by contrast, competes with rivals McKinsey and Boston Consulting Group in helping companies set strategy. It recruits from Harvard Business School, the Wharton School of the University of Pennsylvania and other top schools and assembles groups of seven to 10 consultants to work with clients.

Booz Allen is owned by about 300 top executives, most of whom are in the commercial unit. As the government business has boomed, many executives there have felt an inordinate share of profit was going to executives in the commercial division. The deal in effect allows the partners of the government unit to buy out their commercial counterparts.

"In some respects it had become a very large government services firm with a consulting business," Shrader said. "Watching the business begin to change in tone and complexion prompted questions about whether we should be running this thing as two disparate parts under one umbrella."

The split will also help free the commercial side, which now works under some of the regulatory strictures required by Booz Allen's government work. Employees in both divisions must follow stringent spending and security guidelines, including a requirement that they prominently display their nationality on identification cards and in e-mails. For Booz Allen's business abroad, that's been particularly frustrating, especially in places that frown on U.S. involvement in Iraq.

In the past, some Carlyle critics have raised questions about the firm's ties to the U.S. government -- it has had prominent former political and military officials on the payroll -- and about its foreign investors. In a fact sheet about the Booz Allen deal, Carlyle wrote that its directors won't have access "to any classified information" and that contractors it has owned in the past "have had an exceptional record of properly safeguarding the integrity of sensitive government information."

Michael Lent, a former Booz Allen employee who now writes a newsletter called Government Services Insider, said Carlyle's experience could help Booz Allen gain more business at the Pentagon, where it runs up against bigger firms such as Boeing and Lockheed Martin.

"The firm would like to be more of a player in defense IT than it has in the past," Lent said. "Carlyle, with its defense experience, its connections and its right as owners, may be helpful in making it happen."

Carlyle said the deal was the latest of several recent buyouts, offering evidence of a recovery in the investment industry. "There has been a modest degree of thawing, that the markets have improved a little bit, and that does help this transaction to happen," said Clare, the managing director.

Private-equity expert Robert A. Profusek, a lawyer at Jones Day, said the deal shows that "the credit markets are clearly better than they were at the height of the doom and despair." But he said the money is nowhere near as readily available as it was a few years ago. "It's a return to the pre-bonanza time," he said. "It's a typical private-equity financing."