Monday, November 9, 2009

Lessons from TASC Sale

Northrup Grumman will sell its TASC government consulting unit for $1.65 billion to private equity firms KKR and General Atlantic. NYT reported:

Northrop began talking about selling TASC, which provides technology consulting services, several months ago to satisfy stricter requirements on the conflicts of interest facing military contractors, according to a person briefed on the matter. These companies now cannot provide consulting services to the government while also trying to sell it products.

This is second big sale of a consulting firm to a PEU, private equity underwriter. The Carlyle Group purchased Booz, Allen, Hamilton for $2.5 billion in June 2008. It flirted with Northrop Grumman over TASC.

Northrop’s options included arranging an initial public offering of the unit, selling it to a strategic buyer or striking a deal with private equity firms. Northrop’s chairman and chief executive, said in a statement. “It reflects Northrop Grumman’s desire to align quickly with the government’s new organizational conflict of interest standards, while preserving TASC’s unique organizational culture and its status as the advisory services employer of choice.”

Why is it OK for conflicted PEU's to own huge government consulting companies? The Carlyle Group provided Uncle Sam consulting services and products, to the tune of $4 billion in 2008. A conflicted owner is a conflicted owner.

British Wall Street, known as London's Square Mile, recovered enough to provide financing for the deal.

K.K.R. and General Atlantic will receive financing from Barclays Capital, Deutsche Bank and RBC Capital Markets and the Canadian Pension Plan Investment Board.

Oddly, the Canadian Pension Plan is PEU like in its aggressive pursuit of returns.

The lessons? What individual companies can't do, PEU's can. Malodorous greed and conflicts remain. The bubble machine is back on as shadow bankers double down. Their goal? Grow "too big to fail."