QinetiQ: The Men With the Golden IPO (updated)
By 2005, QinetiQ (pron. “kinetic”) was a vital UK defense research firm whose owners included the British government and The Carlyle Group. This was a transformation from its previous role as part of Britain’s DERA government research agency, but relations remain close and the firm is involved with a wide variety of UK defense projects. DID has covered a number of projects in which QinetiQ has been involved.
As a second step in line with the UK’s 1998 Strategic Review that pressed for the movement of defense research to the private sector, QinetiQ announced on January 12, 2006 that it was headed for an IPO. Each of the current owners would sell a part of their holding in connection with the Global Offer, which was originally expected to raise gross primary proceeds of about GBP 150 million for the MoD, plus significant secondary proceeds from the sales by the MOD and the Carlyle shareholders.
The IPO ended up raising over GBP 600 million from a partial sale of shares, but now a recent NAO report concerning has ignited sharp political controversy…
Since 2002, QinetiQ Group had been co-owned by Carlyle Group, when the US-based buyout firm acquired a 33.8% share from the UK government, with a further 3.7% of the shares to be made available for the employees. Once senior managers invested in new shares of QinetiQ Holdings, however, all previous investor shares were diluted. Ownership after that 2002 partial privatization ended up at: MoD 58.1%, Carlyle 31.4%, Top 10 managers 4.0%, Employee Co-investment plan 3.4%, and Top 245 managers 3.1%.
The IPO attracted controversy from the start. Small investors were not happy about their exclusion, investigations were launched, and conflict of interest allegations were flying. Unfortunately, pressing the green button in the Aston-Martin, just to the left of the ash tray and martini holder that doubles as a spectroscope, was not an option. In the end, the issue was partially defused by allowing some brokerage firms to place orders in the IPO as part of a combined order, allowing them to sell these IPO shares to their own retail clients.
The IPO tok place on Feb 10/06, and QinetiQ finished at 191.5p per share, for a corporate valuation of over GBP 1.3 billion. The Ministry of Defense moved to a 19% stake in QinetiQ Group following the IPO, while Carlyle Group owned 13% of the company based on the amount of their share ownership sold.
Nov 23/07: The NAO report: “The privatisation of QinetiQ“. Current Prime Minister Gordon Brown, who was Chancellor of the Exchequer (finance minstry) at the time, comes in for criticism alongside the UK MoD – yet the report is far more balanced between positive and negative conclusions than media portrayals would indicate. Their criticism focused on 2 main areas:
Carlyle’s initial 2002 stake. The Ministry of Defense ended up selling a 31.4% share of Qinetiq to Carlyle for GBP 42 million pounds ($87 million) in 2002. That 31% was worth 374 million pounds when Qinetiq sold shares to the public for the first time in February 2006. Carlyle’s final price had ended up GBP 55 million lower than its GBP 374 million bid after negotiations, due to negotiations on QinetiQ’s pension fund deficit and the Long Term Partnering Agreement (LTPA). The commercial value of the LTPA was not fully understood at the time of the sale to Carlyle, but turns out to be around GBP 5.6 billion in revenues over 25 years, a figure that affects QinetiQ’s valuation.
QinetiQ senior management’s share option plan. The NAO criticized the share option plan for the 10 most senior managers, who collectively invested 537,250 pounds in the company (roughly $100,000 each on average). Their collective shares were worth GBP 107 million by the time the IPO took place. The NAO adds that “We think that the the returns to management exceeded what was necessary to incentivise them,” while noting that QinetiQ’s subsequent valuation was a surprise to the government.
Hindsight is 20/20, but the NAO also says the government was wrong to let QinetiQ’s management discuss their potential compensation package with Carlyle before it was named as the preferred bidder [in 2002]. It adds that the government should have sought specialist advice in this matter.
Nov 23/07: The UK Ministry of Defence responds. “MOD responds to NAO report on the privatisation of QinetiQ.”
Their view remains that the privatization has been an overall success, and they take pains to note the NAO’s agreement that the previous status quo was not sustainable. The 2002 sale of a minority stake in QinetiQ to the Carlyle group was run on MOD’s behalf by UBS, a global investment bank, in line with normal market practice, and they contend that the price/value was what the market determined at the time. The MoD cites more than GBP 800 million in value for the taxpayer [DID: they mean the sale proceeds plus their holdings’ value], who has derived the most benefit from the shares’ rise in price, while securing long-term viability for key defense research capabilities and its 13,500 staff.
The UK MoD is also working on a more detailed response to the NAO’s criticisms.
Nov 23/07: QinetiQ responds in an official release:
“At the time when QinetiQ was being auctioned in 2002 its future was far from assured. Its core research business – over which it had enjoyed a near monopoly – was being opened up to full competition, and it lacked wider market access for its technology. The NAO records that between 2003 and 2006 QinetiQ’s management and staff overcame these challenges and drove a 36 per cent increase in revenues and 261 per cent increase in operating profits.
This outstanding performance of the company, outstripping anything that was expected at that time, has driven the excellent returns for all shareholders.”
June 27/07: QinetiQ announces the creation of a new technology venture fund called QinetiQ Ventures LP by QinetiQ and Coller Capital, a leading global investor in corporate venture assets. QinetiQ has established the new fund to drive faster growth from its venture portfolio by creating an independent team with exclusive management focus and long term capital commitment, as a next step in the commercialisation strategy QinetiQ set out at IPO.
The fund, which will be structured as a Limited Partnership managed by an independent investment manager, will have initial assets of GBP 40 million. QinetiQ and Coller Capital will each contribute up to GBP 20 million of follow-on funding to accelerate development of the fund’s portfolio companies. Depending on the performance of the fund, QinetiQ will own up to 75% of its future economic value.
Feb 10/06: QinetiQ Group Plc (ticker: QY6), said its IPO was priced at 200p per share, and that it had raised GBP 617.5 million. Their GBP 1.3 billion total valuation was at the higher end of the predicted 165p-205p per share. Newratings report. The initial price was 191.5p, rising to over 217p a week after the deal.
The UK MoD makes GBP 360 million (about $627 million), rather than the expected GBP 150 million. GBP 250 million is reinvested in defense spending, and the MoD retains a 19% stake in the firm. The Carlyle Group makes about $281 million from its partial share sale, and retains a 13% stake in the firm.
Jan 20/06: QinetiQ buys Analex Corp. for $173 million, in a bid to extend its US footprint and diversify away from dependence on British R&D spending. See DID coverage for full details.
The GBP 91.8 million ($163 million) deal represents QinetiQ’s first US acquisition.
Dr David Anderson, President and CEO of QinetiQ Inc, QinetiQ’s US subsidiary says that “Strategically, the acquisition of Foster-Miller will be key to achieving QinetiQ’s goal of growing our US business significantly.”
The 2007 NAO report would go on to acknowledge that growth in the US market ended up accounting for most of the firm’s revenue growth from 2003-2006.
Feb 28/03: Finalization of the sale to Carlyle, following adjustments. Carlyle’s offer slips from GBP 187 million to GBP 155 million ($245 million) in light of revealed pension fund deficits, and calculations re: the value of the QinetiQ-MoD Long Term Partnering Agreement.
Dec 5/02: The Carlyle Group becomes the preferred bidder for the stake in QinetiQ PLC. More than 40 private equity firms initially bid for a minority stake in QinetiQ in an auction run by the Swiss banking firm UBS AG. Carlyle’s bid is considered to offers the most attractive offer for the smallest equity share, and becomes the “preferred bidder” – but the firm does eventually gain a 51% voting interest, which equates to control. Carlyle Group release.
Aug 16/02: Carlyle and Permira both submit revised final offers per the MoD and UBS’ request. Carlyle offers an increased value of Â£374 million before adjustments. Permira introduces Candover as their new equity partner, but the conditions of their original offer remained the same, and so does their GBP 325-350 million valuation.
July 15/02: Carlyle and Permira submit the only compliant final bids. Carlyle submits a conditional bid values the business at Â£350 million before adjustments. Permira values the business within the range of Â£325-Â£350 million before adjustments, but submits a highly conditional bid that had greater risk attached. Permira proposed to submit a binding bid following further due diligence, and proposed the introduction of a new investment partner.
July 8/02: MoD invites the remaining bidders to submit bids on the basis of purchasing both 51% and 35% of QinetiQ.
May 23/02: The MoD, working with UBS Warburg, decides to shortlist Carlyle, Permira, Goldman Sachs, and Candover for the initial QinetiQ partner stake. This decision was approved by the Treasury on May 27/02.
- QinetiQ – Investor Centre, Financial Results
- UK MoD – Fact Sheets: MoD and QinetiQ
- The Carlyle Group – QinetiQ Case Study
- Bloomberg (Nov 23/07) – Qinetiq Sale Mishandled by Government, Auditors Say (Update3)
- Financial Times (Nov 22/07) – Qinetiq sold ‘too cheaply,’ says NAO
- TheyWorkForYou.com (Feb 26/06) – House of Lords Debate re: QinetiQ IPO
- Washington Post (Feb 13/06) – Carlyle Shows It’s Still Tops In Defense: Investment in Qinetiq Pays Off Handsomely. The calls for an NAO investigation had already begun.
- Defense Tech (Jan 24/06) – “Q Branch’s” Stock Market Shenanigans. Lots of links.