Booz Allen explores sale of government unit

Officials at Booz Allen Hamilton Inc. are considering selling off the company's lucrative government contracting business to concentrate on commercial consulting.

The possibility of a sale was the subject of an electronic letter sent to all employees over the weekend by Chairman and Chief Executive Officer Ralph Shrader.

Shrader said the company's partners and board of directors had discussed a new strategic direction "that could lead to our commercial and U.S. government businesses operating as separate firms in the future."

Shrader said the company's global commercial consulting practices and government business have substantially different operating needs, regulatory requirements and capital funding.

Over the years, he said, Booz Allen has adopted different approaches to managing its diverse portfolio. It has experimented with separate operating units, different regional organizations and even tried to mesh the different businesses into a single entity.

"Based on these experiences, we believe that, going forward, the long-term success of our two major businesses ? and our clients and people ? could be enhanced by complete focus on their distinct markets," he said.

Shrader said that Booz Allen is highly successful and well-respected in all markets, and "that will continue in any structure we may adopt going forward. Let me assure you that our major businesses are all performing well and any strategic step would be taken from a standpoint of strength to position all parts of the firm for future growth and success."

A decision could be expected by March 31, the end of Booz Allen's fiscal 2008, he said.

Media reports said officials have already discussed a potential sale with the Carlyle Group, a Washington private equity firm. But that was not confirmed.

Company officials could be talking about a sale to a private equity firm to diversify the portfolios of the 300 partners of the employee-owned company, said Richard Knop, senior managing director at BB&T Capital Markets Windsor Group, which specializes in mergers and acquisitions. Knop writes a column for Washington Technology.

Knop said he has no personal knowledge of Booz Allen's plans. But selling a controlling interest to a private equity group provides liquidity for all the shareholders, in this case the employees, he said.

"It would probably be to re-fund what we call repurchase obligations," he said. That typically means buying out the equity interest of retiring partners.

Knop said an aging group of partners would have an increasingly adverse effect on a company's working capital and its ability to make acquisitions. "They haven't made acquisitions of any significance ever," he said. "So maybe the real motivating reason is [to retain] capital for growth so that they can make acquisitions as well as grow organically."

"Frankly, for a company the size and ilk of a Booz Allen, [a sale to gain capital for growth] would be a prudent thing to do for all those reasons," he said. It also might position the company to go public again, as it was several years ago, Knop said.

The company has about $4 billion in sales annually, almost half from federal contracts.

Booz Allen Hamilton, of McLean, Va., ranks No. 13 on Washington Technology's 2007 Top 100 list of the largest federal government prime contractors.