Today, Booz Allen Hamilton, as a public
company, maintains a debt to total
capitalization percentage of more than
80 percent, while the remainder of the
publicly traded industry is closer to 25
percent. In the years since the MBO,
The Carlyle Group has taken advantage
of this leverage to provide itself with a
healthy cash return for its sponsorship.
Is there an Achilles heel to the
investment strategy that has flourished
in the government industry for the
past decade? A prudent investor might
model low-growth or even no-growth
when determining a leveraged buyout
capital structure, but in the face of 20
years of increased government spending
on outsourcing, how many of these
investments have been modeled with
negative growth? Shrinking revenues
and shrinking cash flows in the face
of constant balance sheet leverage
can be a sure recipe for disaster.
But wait, proponents of the strategy
might say—no government industry
company has ever gone belly up. At
worst, the poor performers simply
shrink and fade away. That is not
true. In February 2009, the mighty
BearingPoint Inc., a public company
spun out of KPMG, filed for bankruptcy
protection after two years of struggling
with losses on its services contracts,
including those with state and local, as
well as federal, entities. An examination
of what happened to BearingPoint
might provide a model for current
government companies (especially
private equity backed entities) that may
start struggling with their debt load.
BearingPoint “demergered” from
KPMG in 2000 and was an IPO in
2001. Fueled by its success in the
U.S. governmental services market
and by access to inexpensive debt
and public equity capital, the newly
public BearingPoint went on a global
acquisition spree, buying what
were viewed as bolt-on businesses
to its main U.S. platform. However,
expected synergies proved hard to
achieve and financial performance of
the company’s units in the non-U.S.
federal markets began to nosedive.
Unable to downsize appropriately or
otherwise shed unprofitable contracts,
BearingPoint was forced in 2009
to file for Chapter 11 bankruptcy
protection with a self-described
“prearranged” restructuring plan. It
soon proved difficult for BearingPoint
to obtain all of the required support,
both from the company’s formal
bankruptcy constituents and many
of its foreign “partners,” to confirm
the proposed plan quickly.
At the same time, customary concerns
about the effects the bankruptcy was
having on BearingPoint’s customer base
(and particularly on its primary customer,
the U.S. government) and employee
retention decreased the company’s
negotiating position in bankruptcy.
Various constituents began pressing
the company to consider other options,
including a Bankruptcy Code Section 363
sale of some or all of its business units.
BearingPoint had previously run a
sale process that had failed to produce
any acceptable offers. There was
considerable concern that a 363 sale
process would prove ineffective,
particularly given the practical and legal
issues surrounding the transfer of federal
contracts. However, one party, Deloitte,
emerged that was willing (and able) to
move quickly and negotiate a stalking
horse agreement to buy a significant
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