After a long investigation into the part-sale of QinetiQ (the MoD’s Defence Evaluation and Research Agency, as it used to be known) to US private equity firm The Carlyle Group, the NAO has concluded that the price agreed for the business was much lower than it should have been – meaning that the exchequer lost out on millions of pounds in potential proceeds.
The government span QinetiQ out of the MoD in 2001, with a view to developing its technology for commercial use. Two years later it sold a 37.5% stake to Carlyle, which had a long history of investing in defence-related businesses in the US, for £42m – valuing the business at £342m. By the time the company went public in London in 2006, its value had soared to £1.3bn.
As a result, a few civil servants got very lucky indeed. Chairman Sir John Chisholm’s £130,000 of shares were suddenly worth £26 million, while CEO Graham Love’s £110,000 investment turned into £21.3 million. Overall, the group’s management team made a 20,000% profit in three years. ‘We consider that the returns in this case exceeded what was necessary to incentivise management,’ the NAO said primly – possibly the understatement of the year.
There’s no doubt that the business flourished under private ownership. But according to the NAO, the main conclusion from this huge return was that the government sold the business on the cheap in the first place, in its eagerness to use the proceeds to prop up the defence budget.
It was also scathing about the government’s breathtaking incompetence during the sale process. Carlyle was cleverly named as the preferred bidder even before the financial details of the deal had been agreed – whereupon it promptly negotiated the price down. The US firm probably couldn’t believe its luck – it’s like agreeing to sell your car to someone before they’ve offered you any money…
The deal also had the unwelcome side effect of irritating the US, which had been working alongside the MoD to develop these technologies only to see the company sold from underneath it – without receiving any of the proceeds.
It’s all very reminiscent of the way that the Russian oligarchs like Roman Abramovich took advantage of the fire sale after the collapse of Communism to accumulate their massive fortunes. Wherever there’s a government asset sale on, you can pretty much guarantee that there will be bargains galore to be found…