|
Carlyle crusader { May 14 2002 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A11748-2002May13.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A11748-2002May13.html
Crusader a Boon to Carlyle Group Even if Pentagon Scraps Project
By Walter Pincus
Washington Post Staff Writer
Tuesday, May 14, 2002; Page A03
Whatever the fate of the Army's multibillion-dollar Crusader mobile artillery system, it has already helped provide an ample return for some of Washington's most prominent power brokers.
Retired Army generals, including a former chairman of the Joint Chiefs of Staff, received six-figure payments after being placed on the board of United Defense Industries Inc., the Arlington-based company that has been developing the Crusader. Former Sen. Dan Coats (R-Ind.), the late former Rep. Marvin Leath (D-Tex.) and other lobbyists shared in more than $1 million that United paid in each of the past three years to promote the Crusader and other weapons systems it was developing and producing.
But the biggest winner has been the Carlyle Group, the Washington investment firm headed by former Defense Secretary Frank C. Carlucci and other stars of past administrations, Republican and Democratic. Since purchasing United in 1997 for roughly $173 million in cash and $700 million in borrowed funds, Carlyle has reaped more than $400 million in dividends and capital gains from United, according to government filings.
Carlyle's financial success with United -- and the success of others associated with the Crusader -- shows how major Pentagon weapon systems can turn into cash cows.In turn, United's lobbying expenditures and campaign contributions show why they can be so difficult to kill, as Secretary of Defense Donald H. Rumsfeld announced he would try to do with the Crusader last week.
"Carlyle's aggressive approach . . . is one reason why the Crusader lived this long," said Lawrence J. Korb, an assistant secretary in the Reagan Pentagon and now director of studies at the Council on Foreign Relations. Even if Rumsfeld's decision stands, Korb said, United still will have received $2 billion from the Crusader program and will receive substantially more to close it down.
From its start in 1987 in a room in New York's Carlyle Hotel, the group has grown from four investors with $5 million in capital to a globe-spanning private equity fund that manages more than $12.5 billion. Defense and aerospace firms have made up a significant portion of its portfolios, but the firm also has invested in real estate, health care, bottling and information technology firms.
Carlyle's leadership is well known. In addition to Carlucci, it includes former secretary of state James A. Baker III; former Office of Management and Budget director Richard Darman; William E. Conway Jr., former chief financial officer of MCI Communications Corp.; andDavid M. Rubenstein, a former domestic policy adviser in the Carter White House.
Carlyle's takeover and financial management of United is a case study of the leveraged buyouts of the 1990s, when investment groups bought companies with borrowed money, restructured their operations and finances, and then sold stock in the ventures to the public. In United's case, Carlyle recouped its original investment and more -- through management fees and dividends the company paid out of borrowed funds -- even before taking the company public.
It was in October 1997 that Carlyle acquired United from FMC Corp. and Harsco, paying $880 million. United had produced tracked combat vehicles and Navy guns for more than two decades; its best-known unit was the Bradley Fighting Vehicle, but it also produced the M109 self-propelled howitzer and Navy weapons including a destroyer gun and a vertical launching system for cruise missiles. It was also the sole-source developer of the gun for the new DDX destroyer.
But many of its main products, including its mobile M109 armored gun and the Bradley Fighting Vehicle, were coming to the end of their production cycles; only much less lucrative upgrades were in the future. The company would have lost more than $1 million in both 1996 and 1997, according to pro-forma accounting prepared for Carlyle during its acquisition.
However, United also had a key asset -- a 1994 contract then worth $1.1 billion over its lifetime to design and develop the Crusader by 2003. The system, Army officials have said, would provide more than double the firepower of the Army's 40-year-old Paladin howitzer, with far more precision.
Even then, however, the Crusader's critics were making their case that the system was too heavy for the air transport required for modern warfare, saying it was conceived essentially for fighting a major ground war in Europe.
In 1997 and 1998, after Carlyle acquired the company, United appointed three outside directors to its board; two of them were former top Army generals, J.H. Binford Peay III, the just retired commander-in-chief of Central Command, and John M. Shalikashvili, the retired former chairman of the Joint Chiefs of Staff.
At the same time, United stepped up its spending on lobbying for both the Crusader and the Bradley upgrade, allocating more than $1 million a year in 1998, 1999, 2000 and 2001.
In 1999, United paid $200,000 to the lobbying firm run by Leath, a former Texas Democrat who, after 10 years in Congress, where he served on the Armed Services Committee, set up a firm representing military contractors. He was paid $100,000 more in the first half of 2000 but died later that year.
That year, United also hired several other firms, among them Verner, Liipfert, Bernhard, McPherson & Hand, which was paid $140,000, according to its lobbying report to Congress. The firm in turn enlisted Coats, who had been a senior member of the Senate Armed Services Committee, and Michael R. O'Brien, Coats's former legislative assistant, to handle the defense authorization and funding bills for United that year, according to Senate records.
Another defense lobbying firm, Ervin Technical Associates, received $30,000 from United in 2000, after former Rep. Joseph M. McDade (R-Pa.), a former vice chairman of the House Appropriations Committee, became chairman of the firm's board.
When it came time for the 2000 elections, United made campaign contributions to no fewer than 50 members of Congress -- including 15 on the House Appropriations Committee and 26 on the House Armed Services Committee -- according to the company's campaign reports filed on Capitol Hill. United Defense LP Employees Political Action Committee boosted its contributions from $49,500 in the 1998 election cycle to $180,000 in 2000.
In addition to checks, usually of $1,000 or more, to members who could vote in committee for its military programs, United targeted other selected members. Rep. J.C. Watts (R-Okla.), whose district has the plant that would assemble the Crusader, received $6,500. On the other side of the Capitol, $3,000 went to Sen. James M. Inhofe (R-Okla.), a member of the Senate Armed Services Committee from the state where the Crusader would be assembled, and $10,000 went to Sen. Rick Santorum (R-Pa.), who in 2000 chaired the procurement subcommittee of armed services.
Not everything, however, went United's way: In early 2000 it was outbid for a Army armored-vehicle contract that promised some $6 billion; the next year, after it complained to the General Accounting Office, its complaint was rejected.
Still, in its annual report for 2001, United announced that it had been awarded a three-year, $697 million contract to complete full upgrading of 389 Bradley units and had added a $655 million contract modification to complete the Crusader's "definition and risk-reduction phase contract," which would be worth $1.7 billion through 2003. Together, the Crusader and Bradley programs contributed 41 percent of United sales in 2001, the report said.
With Crusader and the Bradley upgrade in hand, a decision was made to sell United stock to the public in late 2001. In preparation, United refinanced the roughly $180 million it owed on the original purchase loan, securing a new $600 million loan and $200 million in revolving credit.
The company paid a substantial portion of the newly borrowed funding -- $387 million -- to its shareholders.
The money was paid in two separate dividends to Carlyle and a few insiders, including Carlucci, Peay and Shalikashvili, amounting to $12 for each share then held. Of the 18 million shares then outstanding, Carlyle owned 96 percent. United also declared a stock dividend, providing an additional 1.25 shares for each one then held by Carlyle and the insiders.
After the debt restructuring came the stock offering. The United offering filed with the Securities and Exchange Commission included this boilerplate caveat to potential investors: "The Carlyle group, our other stockholders and our executive officers will realize substantial benefits from the offering."
When it took place, in December 2001, Carlyle sold 11 million shares of the 20 million offered at $19 a share, receiving a total of about $225 million. Even so, Carlyle still owns more than 47 percent of the outstanding United shares and controls United's board of directors.
Also in late 2001, according to SEC filings, Peay and Shalikashvili were paid "performance" bonuses, though their separate employment contracts filed with the SEC state they only are to serve as directors and receive $25,000 annual retainers plus stock options and reimbursed expenses. Peay received $160,000, and Shalikashvili $102,586, according to a filing with the SEC.
A United spokesman said the generals did no lobbying and that their bonuses were similar to ones given company officers based on "the performance of the company."Neither retired general responded to requests for comment. Korb, who served as a vice president at Northrup, said he had never heard of company directors receiving bonuses based on the performance of the company.
Since Rumsfeld's announcement Wednesday that he was canceling the Crusader, United's stock, which hit a high of $29.85 when it looked like Crusader was on track, has declined to $21.60, a drop of just over 27 percent.
White House spokesman Ari Fleischer told reporters that President Bush supported Rumsfeld and said any fight over the Crusader "will be an important test case to see whether Congress spends the money in any case, or whether they agree with the experts and follow the recommendation of the Pentagon."
On Thursday, the full House approved the fiscal 2003 defense authorization bill containing the original $475 million the Pentagon sought for Crusader and a legislative provision saying the system is not to be terminated. The same day, the Senate Armed Services Committee left the Crusader money in its version of the fiscal 2003 authorization bill, saying it would make a final decision this week, after it hears directly from Rumsfeld.
© 2002 The Washington Post Company
|
|
