The Carlyle Group, the Washington-based merchant banking firm, announced yesterday that it would purchase McLean-based BDM International Corp. for $130 million, about a third of what Ford Aerospace Inc. paid for the defense contractor only two years ago.
Industry sources said the price indicates how far the values of defense services companies have dropped in the face of uncertainty over military spending for the next few years. Ford Aerospace paid $425 million for BDM.
The Carlyle Group originally bid for all of Ford Aerospace earlier this year. It lost out to Loral Corp., a New York defense electronics company that is paying Ford Motor Co. $715 million in cash for the subsidiary. Carlyle has agreed to purchase BDM from Loral on the same day that the sale of Ford Aerospace is complete next month.
Carlyle's vice chairman, former defense secretary Frank Carlucci, will become BDM's chairman, and Earle Williams, the outspoken president and chief executive officer of BDM who has known Carlucci for years, will remain in his current position. Williams said no layoffs are expected as a result of the sale. BDM has 3,100 employees.
A Carlyle source said federal restrictions on the activities of Pentagon officials who go to work for defense contractors will not affect Carlucci because he left his Cabinet post more than a year ago and will have no direct contact with the Defense Department.
Carlyle said it agreed to pay $115 million of the $130 million acquisition price in cash and the rest in debt and warrants.
Of the $115 million in cash, a Carlyle source said, nearly $80 million would be borrowed and the balance would come from the company's own reserves and its institutional investor partners, such as the Mellon family and the Equitable Life Assurance Society.
Sources said Loral decided to sell BDM after BDM officials raised concerns about conflict-of-interest problems Loral could face if it owned the company. In the past, the Pentagon has hired BDM to evaluate and test defense electronics systems produced by Loral and other companies.
In a statement issued by Loral, Chairman Bernard L. Schwartz said BDM is "not within the core activities of either Loral or Ford Aerospace."
The Carlyle Group has been on an acquisition binge since its formation three years ago. The company -- which is headed by Carlucci, former MCI chief financial officer William Conway Jr. and former White House aide David Rubinstein -- has led partnerships that have acquired Coldwell Banker Commercial Group; Ticketron, the computerized ticket company; Oakite Products Inc.; and Marriott Corp.'s in-flight catering division.
Carlyle also has an 8.5 percent stake in Harsco Corp., a Pennsylvania-based defense and industrial products company. It bought and then sold shares in Ecolab Inc., a cleaning, maintenance and lawn service company, making about $5 million in profits. It also made an unsuccessful bid for Fairchild Industries Inc., but pocketed an estimated $8 million to $10 million on the deal when it sold its 15 percent stake in the company.
A Carlyle source said the company looked at other defense services companies but opted for BDM because it considers the company the "Cadillac" of the industry.
"We regard BDM as an extraordinary professional services company and are pleased to have the opportunity to reestablish BDM as an independent company," Carlucci said in a statement released by Carlyle. "I have known Earle Williams for many years and have the highest respect for him and the management team he has assembled."
In fact, it was Williams who first told Carlyle about Ford Motor's plans to sell its defense division and who encouraged Carlyle to bid for Ford Aerospace, according to a Carlyle source.
Williams and BDM's senior management will be given a share of BDM at the beginning, between 10 percent to 25 percent, depending on the company's performance and other factors, according to the source. Eventually other employees will be given the opportunity to invest in BDM.
Most of BDM's work is with the Pentagon. Williams said that Carlyle wants BDM "to try harder in the commercial arena. We completely agree with that." He added that he expects Carlucci to "provide entree into the executive suites of major corporations we think we can do business with."
BDM is one of the better known of the hundreds of companies in the Washington area that provide "professional services" to the government: engineers to test weapon systems, computer scientists to write software, mathematicians and physicists to evaluate advanced technologies, and economists and political scientists to assess world events. A few years ago, these companies were hotly pursued by investment bankers, as buyers believed such firms would flourish because of a military that was becoming increasingly high technological.
Numerous other local defense services companies, most notably Planning Research Corp. of McLean and Advanced Technology Inc. of Reston, have had troubles finding buyers and have seen estimates of their value drop over the past year.