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by Mark Fineman
The Los Angeles Times, January 10,
2002
WASHINGTON -- Even by Washington
standards, the Carlyle Group has some serious clout.
President George W. Bush's father
works for Carlyle; so does former Defense Secretary Frank C. Carlucci,
whose close friend Donald H. Rumsfeld now runs the Pentagon; and so does a
stellar cast of retired generals and Cabinet secretaries, including former
Secretary of State James A. Baker III.
And even by Wall Street standards,
the Carlyle Group has some serious money: $12.5 billion in investments at
last count. The Washington-based private equity firm, which advises and
invests for wealthy clients and institutions, has shown returns of more
than 34% through the last decade, particularly through timely defense and
aerospace investments. So when President Bush declared war on terrorism in
September, few were better poised than Carlyle to know how and when to
make money.
On a single day last month, Carlyle
earned $237 million selling shares in United Defense Industries, the
Army's fifth-largest contractor. The stock offering was well timed:
Carlyle officials say they decided to take the company public only after
the Sept. 11 attacks. The stock sale cashed in on increased congressional
support for hefty defense spending, including one of United Defense's
cornerstone weapon programs.
Carlyle's windfall is a result of
astute business decisions, excellent connections, strategic lobbying, good
timing and a bit of luck. It is also a prime example of how defense
contractors got well in a hurry after the Sept. 11 attacks, in a year when
the Bush administration already was planning steep hikes in defense
spending.
For several years in the late
1990s, United Defense's Crusader Advanced Field Artillery System--a
massive high-tech cannon that could fire faster and with more impact than
any before it--was in trouble at the Pentagon. The system clashed with the
vision many military planners and analysts have for a lighter, more mobile
Army. And its high price tag--originally $20 billion--endangered it in
times of tight defense budgets.
But the suicide attacks on the
Pentagon and the World Trade Center freed up tens of billions of dollars
in new defense spending. United Defense already had modified the Crusader,
making it 20 tons lighter. And the Army had cut its order by more than
half to make it more palatable to budget cutters.
On Sept. 26, the Army signed a
$665-million modified contract with United Defense through April 2003 to
complete the Crusader's development phase. In October, the company listed
the Crusader, and the attacks themselves, as selling points for its stock
offering.
Then Congress fully funded the
system in the defense authorization bill that passed the House and Senate
on Dec. 13, the day before Carlyle's stock sale. And President Bush is
scheduled to open the funding spigot today, when he signs a defense
appropriation bill that includes $487.3 million for the Crusader in 2002.
The ties that bind the president's
family and close advisors to Carlyle have helped draw the confidence of
its investors--and the criticism of outsiders. "It's the first time the
president of the United States' father is on the payroll of one of the
largest U.S. defense contractors," said Charles Lewis, director of the
Center for Public Policy and one of Carlyle's most ardent critics.
"Between Baker and Carlucci, not to
mention dear old dad, the relationship of the president with this
particular company is as tight and close as, well, anyone can imagine."
Carlyle officials bristle at such
talk. They described their recent stock sale as just plain good business
that benefited a wide array of investors, including pension funds like
those of California's state employees.
Carlyle spokesman Chris Ullman said
that neither the company nor its managers, directors and advisors have
ever personally lobbied for the Crusader or other government contracts now
in the hands of United Defense and other Carlyle subsidiaries and
investments.
Of Carlucci, Carlyle's board
chairman, and his friendship with the current Defense secretary, Ullman
said: "I assure you he doesn't lobby. That's the last thing he'd do. You'd
have to know Carlucci to know he'd never do that, and you'd have to know
Rumsfeld to know it wouldn't matter."
But even if Carlyle and Carlucci
don't lobby, their subsidiaries and majority-owned companies do. And
documents on file with the Securities and Exchange Commission, the Federal
Election Commission, the Defense Department and Congress show that they do
so heavily, strategically and persistently.
Midway Between White House,
Congress
By any standard, the Carlyle Group
has the right address. Its suite of offices are on Pennsylvania Avenue
midway between the White House and Congress--a 15-minute walk to each.
It was founded as a small
private-equity firm in 1987 by David M. Rubenstein, a young lawyer who had
worked as an aide in Jimmy Carter's White House, and two investment
specialists. They named the company after their favorite hotel in New York
and started out with a modest portfolio of $100 million.
In 1989, Carlucci retired as Ronald
Reagan's Defense secretary and joined Carlyle. Soon after, the company
aggressively went after defense and aerospace investments, a specialty for
Carlucci and the other former government officials who followed him into
Carlyle.
Their investment strategies paid
off, not only in defense acquisitions and sales but also in a wide array
of corporations. Carlyle's portfolio quickly grew into the billions of
dollars as pension funds and wealthy businessmen and families, including
royal sheiks in the Persian Gulf, invested with the firm.
As its reputation grew, so did the
group's star-studded management roster. It added former Joint Chiefs of
Staff Chairman Gen. John M. Shalikashvili; Arthur Levitt, the long-serving
former chairman of the Securities and Exchange Commission; former British
Prime Minister John Major; former Secretary of State Baker; and former
President Bush (Carlyle officers say the elder Bush's principal role is as
"a draw": delivering speeches at Carlyle-sponsored events).
Last February, the California
Public Employees' Retirement System announced it was investing $425
million in "a strategic partnership" with Carlyle. Even the company owned
by Osama bin Laden's estranged billionaire family in Saudi Arabia was
among Carlyle's clients--a mere $2-million investment that Carlyle said it
bought out after Sept. 11 "for image reasons," Ullman said. He declined to
say whether the Bin Ladens made a profit.
Ullman downplayed Carlyle's defense
connections, saying that today less than 10% of its $12.5-billion
portfolio is in defense, an additional 15% percent in commercial
aerospace, and the rest in real estate, health care, telecommunications
and consumer industries.
Only 15 of Carlyle's 500 employees
are former government officials, Ullman said. Most of the rest are
investment professionals working in 24 offices scattered across the globe.
Carlyle bought Arlington, Va.-based
United Defense LP in October of 1997 for $850 million.
"They basically didn't have
options," said Stuart McCutchan, who edits the Virginia-based Defense
Mergers & Acquisitions newsletter. "What has happened in the last two or
three months has given them an option. The public becomes the buyer."
And Carlyle's timing was
impeccable.
First came the Bush
administration's proposed 2002 defense budget. The document landed in
Congress in June 2001, and it included an 11% hike in defense spending,
including full funding for the Crusader.
Bolstered by the good news and the
prospects for the company, Carlyle took its first dividends from United
Defense on Aug. 13: $289.7 million.
Twenty-nine days later, the two
hijacked airliners slammed into the World Trade Center towers, while
another hit the Pentagon. President Bush declared war on terrorism,
defense industry stocks were suddenly hot and, just five weeks later,
Carlyle was ready to take United Defense Industries public.
On Oct. 22, United Defense filed
its stock-offering prospectus with the SEC.
"The terrorist attacks of September
11, 2001, have generated strong Congressional support for increased
defense spending," the prospectus declared. "We believe that domestic and
international defense spending will grow over the next several years as a
result of an increased focus on national security by the U.S. government
and its allies."
A month later, Carlyle took $92
million more in dividends out of United Defense.
Then, on Dec. 13, the Defense
Authorization Bill passed both the House and Senate, with full funding for
the Crusader, just one day before United Defense went public. United
Defense's president and chief executive, Thomas Rabaut, even got invited
to ring the opening bell at the New York Stock Exchange that day.
Carlyle Managing Director Allan
Holt explained: "The decision to take United Defense public was a function
of the performance of the company, the outlook for its programs in the
defense budget and the receptiveness of the market to defense equity
offerings.
"We have an obligation to try to
achieve the best returns for our investors."
And they did.
By the closing bell, Carlyle, which
still controls 54% of United Defense, had sold more than 11 million of its
shares in the company for a total of $237 million. United Defense raised
an additional $163 million from the sale of about 9 million new shares.
On Wednesday, the company's stock,
which Carlyle and United Defense opened at $19 a share Dec. 14, was
trading for nearly $21.
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