By Steve Gelsi
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 (Initial Public Offering) 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
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
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
The $400 million United Defense Industries IPO was the first to
debut in the latest salvo of stock debutantes by defense
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
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
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.
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
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
Meanwhile the upside moves in military IPOs will likely continue, at
least until the sector gets too saturated, or peace breaks out.