Carlyle Group May Buy Major CIA Contractor: Booz Allen Hamilton

By Tim Shorrock, CorpWatch. Posted March 20, 2008.

The Carlyle Group, one of the world's largest private equity funds, may soon acquire the $2 billion government contracting business of consulting giant Booz Allen Hamilton, one of the biggest suppliers of technology and personnel to the U.S. government's spy agencies. Carlyle manages more than $75 billion in assets and has bought and sold a long string of military contractors since the early 1990s. But in recent years it has significantly reduced its investments in that industry. If it goes ahead with the widely reported plan to buy Booz Allen, it will re-emerge as the owner of one of America's largest private intelligence armies.

Reports of a potential Carlyle acquisition of Booz Allen's government unit began circulating among U.S. military contractors in December 2007, after Booz Allen's senior partners and board members -- a group of 300 vice presidents who own the privately-held firm -- gathered at company headquarters in McLean, Virginia, for an extraordinary two-day meeting.

According to a December 15 letter to Booz Allen employees from CEO Ralph W. Shrader that was released by the firm, the vice presidents signed off on a "new strategic direction" that would involve separating the company's commercial and government units and operating them as separate companies. That was widely seen, both inside and outside the company, as a sign that a sale of one or both of the units was imminent. Shrader said the company hoped to come to a resolution of the issues involved by March 31, 2008.

In January 2008, major newspapers -- each quoting unnamed people close to the situation -- reported that discussions between Booz Allen and Carlyle about the sale of the government unit were underway. According to the Wall Street Journal, the deal will be "centered on Booz Allen's influence in defense and intelligence contracting. If an agreement is reached the sale price will likely be around $2 billion."

Christopher Ullman, Carlyle's chief spokesman, could neither confirm nor deny that a deal was in the works, and declined to comment to CorpWatch about the reports. Because of Carlyle's long experience in the defense sector, he added, such companies "would be a priority for us when the price is right and it's the right fit for us." George Farrar, a Booz Allen spokesman, said his company "has refused to discuss particulars of any ongoing discussions" and would not comment beyond what Shrader wrote in his December 15 missive to Booz Allen's workforce.

Who Is Booz Allen Hamilton?

In 2006, Booz Allen Hamilton, a privately held company based in McLean, Virginia, had a global staff of 18,000 and annual revenues of $3.7 billion. Its work for U.S. government agencies accounts for more than 50 percent of its business. Notably Booz Allen is a key adviser and prime contractor to all of the major U.S. intelligence agencies -- the Central Intelligence Agency (CIA), the Defense Intelligence Agency (DIA), the National Geospatial-Intelligence Agency (NGA), the National Reconnaissance Office (NRO), the National Security Agency (NSA), and -- as well as the Department of Homeland Security (DHS), the National Counterterrorism Center, the Department of Defense and most of the Pentagon's combatant commands.

On its website, Booz Allen describes its intelligence work as part of its broader expertise in information technology. "Whether dealing with homeland security, peacekeeping operations, or the battlefield, success depends on the ability to collect, safeguard, store, distribute, fuse, and share information -- on getting the right information to the right place at the right time," it says. "Our security professionals work in partnership with clients to develop capabilities ... for protecting information and networks against cyber and physical threats."

That has not always been the case: Booz Allen Hamilton was founded as a management consultancy in 1914 in Chicago by three businessmen whose surnames gave the firm its name. In 1940, after more than three decades of giving advice to top ranking companies in America's manufacturing and service economy, such as Montgomery Ward, Goodyear Tire and the Illinois State Railroad, Booz Allen started working for the U.S. military, where its clients included the Army, the Navy, and, after the war, the Air Force and the Pentagon.

Its initial contracts with the Navy in 1940 set the pace for its military work: as a management consultant, Booz Allen helped the Navy restructure for World War II and permeated its ranks with contractors ("Each Navy bureau had a Booz rep," Investors Daily reported in a 2005 profile of the firm). That relationship served as a template for Booz Allen's later work in intelligence and national security where its personnel worked inside government agencies alongside public employees.

Since the late-1990s, Booz Allen has forged a particularly close relationship with the NSA, the spy agency that monitors global telephone, e-mail and Internet traffic for the U.S. military and political leaders, which hired Booz Allen as its chief outside consultant on Project Groundbreaker. This $4 billion project outsourced the NSA's internal communications and networking systems to a consortium led by Computer Sciences Corporation (CSC) and the IT subsidiary of Northrop Grumman.

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