Yes, there are reasons to watch this deal. While some "media" may be taken with "investigative reports" on Carlyle, only a
tabloid or gamey blog would hang its hat on unproved allegations as the basis for stories.
Rather than the titillating, one could look into such possibilities as: whether Carlyle sits on its hands as a passive majority owner (not what top PE firms are known for), or, even though not in operating management, makes its presence felt in such areas as Booz Allen partner criteria, numbers, and elections, inspires or funds new business thrusts, or causes culture change. Carlyle has to have already thought through its inevitable exit, e.g., an IPO, years from now, and will be laying the groundwork long before that. BA's national security business and Carlyle's worldwide web of investors, owners, and projects will continue to make
speculation inviting, or even entertaining for some as the column suggests. But more than ever the counter-intelligence community and alert policymakers are oriented to sniff out and move to block potentially harmful foreign involvements and connections. You can be sure that BA's national security clients have had conversations with BA about Carlyle. But this deal would not be coming off if unsustainable paranoia had won the day. Nonethelss, expect to see certain politicians, special interests, BA competitors, and conspiracy enthusiasts stirring the pot.
Michael Lent, Editor and Publisher, Government Services Insider.

Booz Allen has true competitors? HA! Those awards are sole source disguised as competitive.

Michael Lent's comment might be apropos in a way that he didn't intend. Just last week the story of Appaloosa Management backing out of the Dephi deal, thus preventing G.M.'s primary parts supplier's emergence from bankruptcy, provides a cautionary tale for Carlyle.

What looked like a rock bottom price for Delphi, leading cash rich equity firms trading in debt, and percentage bonus hounds on Wall Street, to salivate, turned out to be a red herring. GM has not done its own turnaround, and probably won't, making the market for their monopoly parts supplier risky on a good day.

Similarly, any analyst or business investor who thinks that the "no-bid" contract growth and insider trading speculation in Defense and Intelligence contracts over the last eight years is anything but a Ponzi scheme doesn't know his Tulip bulb bubbles from his stamp tax balloons.

Ponzi schemes float on the false god that exponential growth continues forever in a resource limited world. But it doesn't take a wizard to realize we are entering an era of resource limits on the Federal budget.

Thus, Carlyle faces two problems:

When a veto-proof Democratic Congress gets its first good look at the mixed bag of tulip bulbs we have been buying for the last eight years, its a pretty good bet Booz Allen Hamilton, and Carlyle will have to make up their own definition of "contract fraud" to keep federal investigators at bay. For their sake, their top executives better hope they can sell it.

But on the business side, the question for Carlyle will be how long it will take to do a turn-around in a defense expenditure constrained world, when the country won't need BAH services anymore, but will instead be buying new tank treads and helicopter rotors to replace all of the ones we have wasted in Iraq.

Che of Great Falls,

[Great nom de guerre, even better if you live in a great big house.]

Roll many of your points together and call them "risk," and this deal is hardly without it. However, the team of C and B are about as talented seers as one could find for the natsec marketplace. Their aims have to overlap a lot. But there also has to be a risk-reward imbalance between them, and it's not necessarily scaled by equity share alone.
A critical advantage companies in the IC and other classified venues have is shelter from a lot of competition and only modest translucence to cut-down on pesky scrutiny by overseers, media, and investors. But Ponzi scheme sounds way too harsh and inappropriate: Wiki-- "fraudulent investment operation that involves paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business." Perhaps you are referring to a C exit via IPO down the pike. That could be a big payday, but if the revenue pipeline presented turned out to be way off, it would do lasting reputational harm to C and B. The operative issue, of course, is how transparent to public stock buyers could the underlying facts possibly be? Not very. But professional services firms get bought and sold all the time. And call me crazy, but being wrong about revenue projections hardly constitutes "fraud," a rather strong word and exceptionally difficult to prove--or to carry out in this M&A barrel. But acquirers and investors can certainly miss things, and most live to tell the tale.
The next Congress may well be as you say, and McC is vocal about wanting to clean waste out of defense acq, and Obama says he
wants to see a lot more competition. Hard to quarrel with their rationale. But the root fact is: the IC, def agencies, and the mil services can't live without most of the services contracting they have. There will be downturns, and things could be tightened up, slowing rev growth and slimming profit. But this genie can't be put back in the bottle. Nonetheless, we can expect to see (very slow) improvement in government acquisition skills, including program and contract oversight and management, and a continued tightening of conflict-of-interest rules.

Michael,

Thanks for reading all the way through my commentary. That has to be the first time my writing has ever enjoyed such a tribute.

As for "fraud" working as a definition at ground level, I think Darleen Druyan's conviction put any challenges of that description to rest. Or, as Samuel Johnson said it so much better a couple of centuries ago: "Nothing focuses the mind like a hanging."

Ms. Druyan went to jail. That is a tough fact to dispute. She went to jail when Senator McCain, whom you cite, told the DOJ to go back and look again at her actions, because they were criminal. (see above). The DOJ had at first fobbed it off, and let her skid by with some made-up excuse of "sovereign immunity" to let her out the back door for her actions.

Somehow that stopped working when the real pros in Federal Law took a look at her deals, and it won't work in the future when the present hacks in DOJ are replaced with some good Elliot Nesses in about a year.

I don't think anyone then will buy giving $52 Million to a neo-con icon like John Ashcroft, in lieu of real penalties, as an adequate substitute for true justice.

So, yes, there is a tad bit of "risk" in the future. Carlyle is going to have to figure that into their business plan, and explain to their Board the handcuffs around the wrists of the former CEOs of Defense/Intel contracting houses.

The rules regarding conflict-of-interest are already tight enough. They just have to be enforced.

I support Che's use of the term "Ponzi scheme", but I think the narrow focus of the reference is what may have thrown Michael off. BA and Carlyle are (probably) not running Ponzi schemes within their black box structures, but the system in which they contract has been all supply-side economics the last 7 years, which IS a Ponzi scheme. The economic theory Pres Bush the 1st called "voodoo economics" has failed again; the premise that the gov't can keep spending as much as they like and running huge deficits because eventually the economy will grow so much the deficits will disappear in a puff of smoke is, by definition, a Ponzi scheme.

As has happened before, a Democratic administration has to clean up the mess left behind by "trickle-down" theory; and that has the capacity to ravage the many companies that have gone into the government contracting business in recent years. The government contracting bubble may well burst.
While Sen McCain IS a spending hawk, he is a war hawk first, so the contrators in the area of defense should be okay for a while if he gets elected.

DISCLAIMER: I'm 90% sure I'm voting McCain.

Carlyle's acquisition of Booz's government contracting business indeed is a gamble from BAH's part. Having revenue's contributing to almost 2/3rd of Booz's total from the Government sector, and most of its intelligence services coming directly from the office of the Pentagon - it is really worthwhile to watch how Booz & Co performs minus the Government intelligence services. Well said Bob.

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