Carlyle Group cashing in again
Commentary: Military IPOs recall heady Net days
By Steve Gelsi, CBS.MarketWatch.com
Last Update: 11:41 AM ET March 19, 2002
cbs.marketwatch.com
WASHINGTON (CBS.MW) - Few investment firms, public or private, have
tonier connections than the Carlyle Group.
Chaired by former Reagan
administration defense secretary
Frank Carlucci, The Carlyle Group is
a $13 billion private equity firm based
just a few blocks away from the
White House on Pennsylvania
Avenue in Washington.
Its principals include former British
Prime Minister John Major, former
secretary of state, James A. Baker
III, and former chairman of the
Securities and Exchange
Commission, Arthur Levitt. Former
President George Bush holds the
official title of senior advisor to the
Carlyle Asia Advisory Board and
gives speeches at events.
Those kinds of ties to the elites of
Washington and beyond have
combined with adroit defense
investments to make for some
spectacular IPOs of late. The
offerings have evoked memories of
the dot-com era as well as providing fodder for conspiracy theorists focused on
the close ties between former government officials and the defense industry.
Eyeing companies for investment, the Carlyle Group has taken part in several
IPOs over the years including VarsityBooks.com, orthodontic firm Align
Technology and high speed Internet firm NorthPoint Communications.
But in the wake of Sept. 11 and heightened defense priorities, military-flavored
IPOs have taken a front seat.
That's good news for Carlyle, which, with ready access to folks like Secretary of
Defense Donald Rumsfeld and Vice President Dick Cheney, is a significant force
as one of the biggest military contractors in the country.
IPOs have surfaced from several players including last Tuesday's Anteon
International (ANT: news, chart, profile), Integrated Defense Technologies (IDE:
news, chart, profile), ManTech International (MANT: news, chart, profile) and
upcoming information technology specialist Veridian.
The $400 million United Defense Industries IPO was the first to debut in the
latest salvo of stock debutantes by defense contractors.
The Carlyle Group purchased a majority stake in United Defense Industries (UDI:
news, chart, profile) in 1997 in the midst of the slowdown in U.S. military
spending following the end of the Cold War.
When the maker of the Bradley Fighting Vehicle and other military hardware
went public in December, the IPO debuted at $19 per share and has since risen
to more than $26 per share.
Carlucci owned 45,000 shares at an average insider cost of $4.44 per share,
according to the company's IPO filings. His tidy paper profit of about $1 million
doesn't include the added dollar value of whatever his stake is in The Carlyle
Group, which retained 55 percent, or 27.6 million shares, of United Defense
Industries, after the IPO.
Granted, there are lockup periods governing when insiders can sell their shares,
but in this time of post dot-com meltdowns and a mostly barren IPO landscape,
it's amazing to see that such big profits are still possible.
New offering
In its latest move Carlyle filed a $160 million IPO last Wednesday for U.S.
Marine Repair, a Norfolk, Va. specialist in maintaining and refurbishing Navy
ships.
Although the IPO market may soon tire of all these military deals, this one
should do fairly well and provide another healthy return for The Carlyle Group,
mostly because of the underlying strength of the overall sector.
Carlyle Group spokesman Chris Ullman pointed out that the company purchased
both United Defense and U.S. Marine Repair several years ago when President
Clinton was in office.
"Three to five years into an investment, Carlyle begins to gauge the most
appropriate exit strategy," Ullman said. "The success or failure of an IPO is
market-driven, with investors deciding what is in their best interest."
Sure it's just good business to buy low and sell high, but the Carlyle Group
makes it look especially easy with all the insiders they have on their team.
Such coziness between government and the private sector is not terribly unusual
in the defense sector. After all, President Eisenhower warned of the dangers of
the "military industrial complex" more than 40 years ago.
Close ties between individuals on one side or the other of the equation are
almost unavoidable because the two rely so closely on each other. The
government needs military hardware for defense, and the industry needs to grow
business.
But it's only recently that the IPOs have been deployed in the business mix by
the Carlyle Group and others. Insofar as the defense IPOs have delivered some
lucrative returns both for company insiders and IPO investors, they may be
positive.
But they also present new areas of concern for watchdog groups and
Congressional oversight committees, especially as defense spending ramps up.
Meanwhile the upside moves in military IPOs will likely continue, at least until
the sector gets too saturated, or peace breaks out.
Steve Gelsi is a reporter for CBS.MarketWatch.com in New York.
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