Carlyle Group Historical Logo (Photo credit: Wikipedia)
In 2008, the Carlyle Group made a large $910 million investment to buy a majority stake in Booz Allen’s government consulting business. The deal saw Booz Allen’s big government advisory unit, which produced most of the firm’s revenue, split off from its corporate consulting group, on the eve of the financial crisis.
But Washington-based Carlyle, which has a long and successful history doing deals involving government contractors, has really made the Booz Allen deal work. It has been an amazing transaction for Carlyle. The private equity firm has made $2 billion in realized and unrealized profits on the Booz Allen Hamilton deal so far. Its $910 million investment is now worth $3 billion.
Carlyle’s acquisition of Booz Allen looked risky back in 2008, but Carlyle believed it could unlock value by separating the cash generating government advisory side of the business from the corporate consulting part of the company. Shares of Booz Allen fell by 3.6% in Monday morning trading after one of its employees, Edward Snowden, leaked information about a secret National Security Agency surveillance program.
Carlyle owns about two-thirds of Booz Allen, which earned $219 million in the year ending March 31, on revenues of $5.76 billion. In 2008, the year Carlyle bought the business, it made $18 million in profits on $3.6 billion in revenues.
Carlyle took Booz Allen public near the end of 2010. The IPO was modest, raising $238 million and pricing at $17 a share, the lower range of what was forecasted at the time. The stock market has never been a big fan of Booz Allen—the stock is currently changing hands for $17.29. As recently as March shares of Booz Allen were trading for $12.59, but they have rebounded strongly in recent weeks.
Stock investors may not be too keen on Booz Allen, however, debt investors love it. As a result Booz Allen has been able to borrow money at relatively cheap rates in the debt market and pay fat dividends to Booz Allen’s shareholders. Because of its big equity position, most of that money has gone to private equity funds run by Carlyle.
The dividends started flowing to Carlyle before it took Booz Allen public. Booz Allen paid big dividends twice in 2009, resulting in Carlyle receiving payments of $104 million and $444 million. Special and regular dividend payments continued to flow to all of Booz Allen’s shareholders after the company became publicly-traded, including a large special dividend last year that saw Carlyle get $621 million. Carlyle’s stake in Booz Allen is now valued at $1.66 billion.
In a statement, Booz Allen said that Snowden has been an employee of the company for less than three months, adding that “news reports that this individual has claimed to have leaked classified information are shocking, and if accurate, this action represents a grave violation of the code of conduct and core values of our firm.” Carlyle declined to comment.
There was a time when Carlyle's ties to the government made the private equity giant a target of conspiracy theories, but the firm has worked hard and successfully to improve its image and limit its connections to the government. In recent years Carlyle has escaped much of the public criticism that has dogged other big players in its industry, like Bain Capital. While other private equity firms have increased their hiring of ex-government officials, Carlyle has moved away from the practice. KKR, for example, recently hired former CIA chief David Petraeus. But Carlyle still does deals in the government space and Booz Allen has been one of its most successful such investments in recent years.
