Booz Allen to Sell Government Unit to Carlyle

By Zachary A. Goldfarb

Booz Allen Hamilton, the giant McLean consulting company and government contractor, announced this morning that it will separate its U.S. government and commercial businesses, selling a majority stake in the government business to the Carlyle Group, the District-based private equity behemoth, for $2.54 billion.

The government unit, based in McLean with 18,000 employees worldwide, is one of the largest private contractors for the U.S. government, doing work for the Department of Defense, National Security Agency and Centers for Disease Control. The commercial unit, based in New York, will become a separate company under the arrangement.

Booz Allen is one of the area's largest local employers, with 13,000 employees.

The announcement culminates sixth months of discussions among senior Booz Allen executives about the future of the company. Motivating the split have been growing differences between the government and commercial units over the past few years: They recruit from different places, have different internal structures and serve vastly different clients. Perhaps most importantly, the two units have had diverging business success: The government unit's revenues surged after the post-Sept. 11 boom in government spending. But the commercial side did not grow as fast.

The transaction must meet shareholder and regulatory approvals and is expected to close by the end of the year.

"This separation of our core businesses marks a dynamic new chapter in our history," Ralph W. Shrader, chairman and chief executive of Booz Allen, said in a statement. "For 94 years, Booz Allen has adapted and evolved as market realities have changed and our areas of expertise have grown."

Splitting up is one of the most significant events since Edwin G. Booz founded the firm in 1914. It is on the scale of the 1976 decision by senior partners to buy back the company, which had gone public six years earlier. Shrader will remain in charge of the government unit, though he is expected to retire in 2009.

The majority stake in Booz Allen represents the most high profile investment in a government contractor by Carlyle Group, which has about $81.1 billion under management and has taken interests in other government contractors. Close observers expect Carlyle to pursue an initial public offering for the government unit within several years.

The deal, while not huge in numbers, also represents a continued thawing of the buyout market, which froze when the economic downturn started last year.

"Booz Allen provides its clients with an unparalleled breadth of domain expertise and technical capabilities. With a strong, diverse portfolio of customer relationships, we believe that Booz Allen is well positioned to continue its market leadership," said Ian Fujiyama, the Carlyle managing director who led the transaction.

The commercial business -- which will include Booz's international government work -- will continue its focus on management consulting.

"As a stand-alone company, the new commercial and international business will have greater agility to meet the needs of its client base, maximize its potential, and realize significant growth across the globe," Shrader said.

By e-mail, Shrader informed Booz Allen employees in December that top executives were pondering a split. Booz Allen is owned by about 300 senior executives.

Most of the company's top executives are concentrated in the commercial unit. That has created tensions as the government business has boomed and the commercial unit has lagged. When profits were divvied up among the owners at the end of the year, many executives in the government division felt an inordinate share was going to executives in the commercial division.

The commercial unit competes with rivals McKinsey and Boston Consulting Group in helping companies set strategy. It recruits from Harvard Business School, Wharton and other top schools and assembles agile groups of seven to 10 consultants to work with clients.
The government unit, by contrast, recruits a broader range of people: recent college graduates, veterans, engineers and many others. Some teams working on government contracts can include 100 or more people.

Last year the government unit generated more than $2.7 billion in revenues and the commercial unit generated about $1.3 billion.

The split will help free the commercial side, which now labors under some of the regulatory strictures required by Booz Allen's government work. Employees in both divisions must follow stringent spending and security guidelines, and they need always to prominently display their nationality -- on identification cards and in e-mails. For Booz Allen's business abroad, that's been particularly frustrating, especially in places that frown on U.S. involvement in Iraq.

The commercial side has other challenges. Years ago, it prospered as companies needed the help of consultants to manage logistics, supply chains and manufacturing plants. But as the service sector grew in prominence, Booz Allen has lagged behind competitors such as McKinsey and Bain that focus primarily on corporate strategy.

By washingtonpost.com Editors  |  May 16, 2008; 9:20 AM ET
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Comments

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en francais... Bureaucrats By the Hour

Posted by: BAH | May 16, 2008 10:47 AM

This is long overdue...I started with Booz Allen in the gov't side of the house (WTB), but moved to the commercial side (WCB) and saw firsthand that these companies are night and day. The WTB rules are suffocating and the pace and quality of work pales in comparison to what gets delivered by the WCB teams. Plus, the work is a whole lot more interesting.

Posted by: Mike Sorce | May 16, 2008 11:25 AM

The Carlyle Group, eh? What, was Satan's bid too low?

Posted by: OhPlease | May 16, 2008 12:28 PM

Any guesses on WCB's new name? A few humble suggestions:

• Raiders of the Office Park (great for a summer Spielberg tie-in!)
• TFFKABAH (The Firm Formerly Known As BAH -- pronunciation has a nice Middle-Eastern flair for those growth markets!)
• Just Give Us Your Damn Money, Already (there's no substitute for honesty!)

Posted by: twohoos | May 16, 2008 12:36 PM

I've heard that WCB will either be called "Booz and Company" or "Booz and Strategy."

Posted by: BAH2 | May 16, 2008 12:50 PM

It looks like a win/win from here as our federal government continues spending dollars out the wazoo on privatization, consulting and intelligence. In addition, Carlyle already has many of its over 1,000 affiliates doing work for the feds.

The new Booz Government Division can have its consultants recommend products or services from fellow Carlyle corporations. BAH's press release mentioned telecommunications, healthcare and defense. It just happens The Carlyle Group organized its portfolio companies in similar fashion.

Their newest affiliate can use its now even greater insider intelligence to gain competitive advantage, as even more work is jettisoned to the private sector in bi-partisan like fashion. Carlyle co-founder William Conway hates a level playing field. The Booz acquisition should tilt government contracts even further in Carlyle's favor. (At least they're starting out with a $12.2 billion indefinite quantity, indefinite delivery contract from Uncle Sam under the military's ENCORE II program.)

Posted by: Alan | May 16, 2008 12:52 PM

WCB destroys the WTB when it comes to the caliber of consultants, and those 220 partners that are a part of the WCB are probably both elated and devastated (since they won't be getting a major chunk of those $2.54 billion). All in all, another government contracting firm's top execs cash out while their minions prepare for the worst.

Posted by: Hilarious | May 16, 2008 1:54 PM

I joined the Firm for one reason - the name brand. I should have known it was going to suck when my offer letter said I'd be working with a DoD client. I wasn't there for a week before I realized I made the biggest mistake of my career. If you want to be a civil servant with a bigger paycheck - go to work for Booz Allen. You are treated like crap from your boss (if you can figure out who that is) and your client (who probably doesn't want you there in the first place). The only people that last there are the folks who can't succeed in the corporate world.

Posted by: Former BAH guy | May 16, 2008 2:09 PM

There are three kinds of people who work for Booz Allen:

1) The partners, who make more money than God (all you have to do is look in the parking lot on a Tuesday morning to confirm this)

2) The idiots who have been at Booz for ten years and think (incorrectly) they are going to be partners;

3) Everyone else, who spend their time updating their resumes and applying for jobs from their Aeron chairs at the Pentagon.

Posted by: 3 Kinds of People | May 16, 2008 2:13 PM

I hear the WTB partners needed the capital from Carlyle to buy out the WCB partners. If the WTB partners had done it years ago, they wouldn't have needed the money. The WCB partners have been benefitting tremendously during the WTB boom, both in annual income and in stock appreciation, while contributing little to the bottom line.

Posted by: Former WTB Employee | May 16, 2008 2:24 PM

A job at Booz Allen is a lot like owning a boat: the only good days are the day you get it and the day you get rid of it. I'd rather clean toilets for the rest of my life than go back to that place.

Posted by: Work / Life Balance | May 16, 2008 2:44 PM

haha all these comments about scrooz allen on the govt side are so true.

Posted by: ex boozer | May 16, 2008 2:55 PM

This is so sad to me. Not to sound like I'm towing the corporate line, but I really enjoy my job with the firm, and the clients I work with. First, I wish the firm would drop the whole "we want to keep you in the news" bit. As expected, the Post informs more than what leadership does. Second, the thought of the firm going public, while making complete business sense to Carlyle and current partners who would stand to benefit from such an endeavor, is heartbreaking to me. One significant advantage to our firm was that we were private and didn't answer to Wall Street. How sad indeed that at the end of the day, Booz Allen is just like the majority of organizations out there--ordinary, uninspiring, and demotivating.

Posted by: WTBguy | May 16, 2008 3:15 PM

If this is the kind of party its gonna be, I'm gonna stick my dick in the mashed potatoes

Posted by: Beastie Boys | May 16, 2008 3:44 PM

Who cares who owns it as the as booz keep flowing at parties and happy hours. hehe...

Posted by: baher | May 16, 2008 5:14 PM

The real indication that the WCB people are nearly as clever as they think is the length of time they were able to last as a rentier class on the boring but billable WTB folks. In about 6 months, watch for a growing exodus as people decide that if they are going to have to deal with the BS of quarterly results, they might as well get paid more somewhere else.

Posted by: Another Ex-Boozer | May 16, 2008 5:16 PM

Sounds like lots of sour grapes from many of the ex employees that couldn't survive the Booz Allen Competency reviews. After reading these reviews, I hope you found the grass to be greener elsewhere. Booz Allen is great if you can sell, deliver, groom staff, and put up with the politics.

Posted by: VA chick | May 16, 2008 10:55 PM

It's nearly impossible to make generalized statements about Booz Allen, because like most firms organized under a partnership structure, it functions as many little firms under one big umbrella. You may be under a branch of the family tree that doesn't operate well, while other areas operate exceedingly well. I happen to be on an Information Technology team that is leading edge with both technology and process. Regardless of where one fits in under the organization, the projects vary tremendously by nature - some interesting, challenging, and fun while others are cumbersome, bureaucratic, and mundane. Overall, in my six years with the firm, I have to say that I still really enjoy the wide array of opportunities. It keeps me on my toes...

Posted by: Booz Employee | May 16, 2008 11:33 PM

What is the source of the revenue number for commercial? Commercial has roughly 3000 total staff and 1500 consultants which is 1/5 the size of market leader
McKinsey with total revenues of 4. 37 billion.

Posted by: exBooz | May 17, 2008 5:46 AM

Booz Employee's comment above hit the nail on the head. The firm definitely operates as many small firms under one umbrella, so every person in the company will have a different experience. It will be interesting to see what direction the firm will head into with this 'news'. I don't agree that there will be a massive exodus within the company because the news is not new to anyone by any means. Besides, the type of people who are really afraid at this type of thing are probably those who know they're performing marginally at best.

Posted by: Arr-lington | May 17, 2008 12:33 PM

I've been in a few organizations during my years in the work world. Booz Allen treats its people better than any other company I've worked for or with. However, I am concerned this culture will now end, because profits will be king. Booz went public once before and it almost destroyed the company. I will have to seriously consider my current recruitment by the government.

Posted by: Core Values | May 18, 2008 10:15 AM

Has any Booz commercial project actually made money?

Posted by: All That Glitters | May 19, 2008 12:46 AM

I just learned that this firm's WTB is being sold off to another company. I would be happy to see that name "Booz Allen Hamilton" would disappear!

Posted by: Ex-Booz Employee | May 19, 2008 11:33 AM

I love the government comments. There are spot on. I just left the government group.

As compared to the commercial side, the government side workers are less qualified and the projects are long term staff augmentation. In my 1.5 years with the firm I was promoted and won several awards but never met my partner. My managers did not really pay attention to me as long as I was billing hours. The best part of my BAH experience was the access to the commercial staff. Since the government side could not figure out where my office was I aligned myself with a commercial office and saw first hand the night and day difference between the two sides but that does not mean the commercial team will be successful. It will be interesting to see how they rebound. As for the government side, it will end up being bought by another firm and BAH will be a foot note in history books as the first management consulting firm.

Posted by: JustLeftBAH | May 19, 2008 6:07 PM

Most people here posting must have sucked at their jobs. :) I've worked on both sides of the house too. To the WTB haters, you clearly sucked at your jobs and left because you couldn't figure out how to pass your performance tests. To WCB folks screaming that its night and day, duh. Get over yourselves, it's just a firm.

Work on both sides can be challenging and rewarding, if you don't like something, you make it happen - stop complaining on an anonymous board. I'm glad you people were forced out at your own will. Lol.

Posted by: lollers | June 1, 2008 12:52 PM

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