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Carlyle Group Cashing In Again
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 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 Communications.

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 the country.

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 Veridian.

The $400 million United Defense Industries IPO was the first to debut in the latest salvo of stock debutantes by defense contractors.

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 War.

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 the IPO.

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.

New offering

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 interest."

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 ramps up.

Meanwhile the upside moves in military IPOs will likely continue, at least until the sector gets too saturated, or peace breaks out.



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