Spies Like Us
BAH Humbug?
“Bathtub falls and police officers kill more Americans than terrorism, yet we’ve been asked to sacrifice our most sacred rights for fear of falling victim to it,” the most famous Booz Allen Hamilton (NYSE: BAH) alumnus opined this week.
That, of course, would be Edward Snowden, fired a week earlier by the venerable consulting firm after defecting to Hong Kong and spilling some of the National Security Agency’s most sensitive secrets, namely its vastly expanded ability to spy on the citizenry’s phone and Internet communications.
Snowden’s revelations shone unwelcome spotlight on a company that makes a lot of its money in the classified shadows. The US government accounts for more than 98 percent of Booz Allen’s revenue, with a bit more than half coming from the Department of Defense and nearly a quarter from US intelligence agencies.
In the immediate aftermath of the bombshell leak, there was a lot of uneducated speculation about whether it might mark the beginning of the end for Booz Allen. Why would the government wish to continue to do business with a contractor that let a briefly employed high-school dropout surreptitiously copy top secret information? Over the next three trading sessions, the stock slid 8 percent. Senators fulminated about limiting classified clearances for contractors. After a terse statement announcing Snowden’s dismissal and disavowing his actions, the company clammed up.
More in-depth reporting since suggests rather limited risk to Booz Allen’s business and bottom line. Start with the fact that Snowden had been previously directly employed by the Central Intelligence Agency as a computer technician. His security clearance was handled by yet another private firm, one now being probed on suspicion of insufficient diligence in such investigations.
And while Booz Allen screeners reportedly overlooked known discrepancies on his resume, it was the government’s faulty security protocols that allowed him to spirit the NSA’s deepest secrets out of a supposedly secure NSA facility. Just this week, the NSA director testified that the agency would be implementing a “buddy system” requiring two authorizations for the download of classified information onto portable media.
Whether you view Snowden as a hero or a traitor, he clearly took advantage of institutional security gaps that extend way beyond Booz Allen.
But there are even better reasons to believe the firm will walk away from this embarrassment largely unscathed. For one, it’s at a forefront of a stealth privatization of core government functions under way for going on 20 years. This has progressed so far that government, including its huge security apparatus, could hardly function without private-sector hand-holding.
Private contractors like Booz Allen now reportedly garner 70 percent of the annual $80 billion intelligence budget and supply more than half of the available manpower. They’re not going away any time soon unless the CIA and NSA want to start over and with some off-the-shelf laptops, networked by the Geek Squad from Best Buy. Security clearances used to be a government function too, but are now a profit center for various private-equity subsidiaries.
Reversal of the privatization initiatives, now matter how ineffectual and ultimately costly, would also threaten to jam the rapidly spinning revolving door linking the interests of government officials and the private contractors they oversee. For example, Booz Allen Vice Chairman Mike McConnell, a former NSA director under Bill Clinton and director of national intelligence for George W. Bush, is on his second tour of duty with the company, overseeing its booming cyberwarfare business. The current director of national intelligence is a former Booz Allen executive, notes BloombergBusinessweek.
Booz Allen has lent its vaunted brainpower to the government since 1940, when it helped the Navy come up with a plan for hunting German submarines. It’s now involved in everything from the tracking of foreign gang leaders for immigration enforcers to systems administration for the NSA. Nearly half of its 24,500-strong workforce has a Top Secret security clearance (another 28% are cleared for merely Secret info.)
Despite the pain dealt by the current budget sequester to public services and federal employees, government consulting remains hugely lucrative for Booz Allen (which boasts of industry-leading margins) as well as its many competitors. For instance, while revenue was down 1.7 percent in the recently completed fiscal year amid fiscal austerity, operating income rose 15 percent in the wake of 1,500 layoffs that included 500 consultants, many of them senior and well-paid. Management has taken the meat cleaver to overhead in other ways too, boosting margins. This year, compensation will be an area of focus yet again with organic revenue expected to be down some 5 percent while earnings per share are forecast by the company to creep higher.
Over its 99-year history, Booz Allen has transitioned from a partnership to an independent corporation and now, finally, a private-equity subsidiary following its 2008 buyout by the Carlyle Group. At that time, Booz Allen’s commercial and overseas business was spun off, and the rest was re-listed two years later, though Carlyle retains two-thirds of the shares and absolute control over decision-making.
The stock has underperformed, though the $1.1 billion in extraordinary dividends Carlyle ordered paid chiefly to itself last year with borrowed money assured a positive return since its IPO. More impressively, shares rallied 40 percent in the seven weeks leading up to the quarterly and annual results reported May 22 and, despite all the publicity surrounding Snowden, remain just 7 percent off that high. The report confirmed that the sequester’s threat to contractor profits and future revenue was vastly overblown.
From a shareholder perspective, Booz Allen’s willingness to cut senior staff and overhead in defense of profits is certainly a plus, as is the potential that Carlyle will pay itself another big dividend with borrowed money. The downside is that it could also enjoy a nice payday by selling more of its stake, which has already produced a return of more than 200 percent since 2008. Carlyle is playing with house money at this point, while new buyers are taking the risk of a depressing equity offering as well as the debt incurred to pay last year’s ransom in dividends.
So despite the promise of the cyber warfare and cloud capabilities Booz Allen is now marketing not just to Uncle Sam but also to Mideast governments and US banks and energy producers, resist the urge to buy the “Snowden dip.” Booz Allen is an investment that works best for senior insiders and their paymasters at Carlyle. Everyone else is dispensable. Security risk is just one of the risks of this security.
“Bathtub falls and police officers kill more Americans than terrorism, yet we’ve been asked to sacrifice our most sacred rights for fear of falling victim to it,” the most famous Booz Allen Hamilton (NYSE: BAH) alumnus opined this week.
That, of course, would be Edward Snowden, fired a week earlier by the venerable consulting firm after defecting to Hong Kong and spilling some of the National Security Agency’s most sensitive secrets, namely its vastly expanded ability to spy on the citizenry’s phone and Internet communications.
Snowden’s revelations shone unwelcome spotlight on a company that makes a lot of its money in the classified shadows. The US government accounts for more than 98 percent of Booz Allen’s revenue, with a bit more than half coming from the Department of Defense and nearly a quarter from US intelligence agencies.
In the immediate aftermath of the bombshell leak, there was a lot of uneducated speculation about whether it might mark the beginning of the end for Booz Allen. Why would the government wish to continue to do business with a contractor that let a briefly employed high-school dropout surreptitiously copy top secret information? Over the next three trading sessions, the stock slid 8 percent. Senators fulminated about limiting classified clearances for contractors. After a terse statement announcing Snowden’s dismissal and disavowing his actions, the company clammed up.
More in-depth reporting since suggests rather limited risk to Booz Allen’s business and bottom line. Start with the fact that Snowden had been previously directly employed by the Central Intelligence Agency as a computer technician. His security clearance was handled by yet another private firm, one now being probed on suspicion of insufficient diligence in such investigations.
And while Booz Allen screeners reportedly overlooked known discrepancies on his resume, it was the government’s faulty security protocols that allowed him to spirit the NSA’s deepest secrets out of a supposedly secure NSA facility. Just this week, the NSA director testified that the agency would be implementing a “buddy system” requiring two authorizations for the download of classified information onto portable media.
Whether you view Snowden as a hero or a traitor, he clearly took advantage of institutional security gaps that extend way beyond Booz Allen.
But there are even better reasons to believe the firm will walk away from this embarrassment largely unscathed. For one, it’s at a forefront of a stealth privatization of core government functions under way for going on 20 years. This has progressed so far that government, including its huge security apparatus, could hardly function without private-sector hand-holding.
Private contractors like Booz Allen now reportedly garner 70 percent of the annual $80 billion intelligence budget and supply more than half of the available manpower. They’re not going away any time soon unless the CIA and NSA want to start over and with some off-the-shelf laptops, networked by the Geek Squad from Best Buy. Security clearances used to be a government function too, but are now a profit center for various private-equity subsidiaries.
Reversal of the privatization initiatives, now matter how ineffectual and ultimately costly, would also threaten to jam the rapidly spinning revolving door linking the interests of government officials and the private contractors they oversee. For example, Booz Allen Vice Chairman Mike McConnell, a former NSA director under Bill Clinton and director of national intelligence for George W. Bush, is on his second tour of duty with the company, overseeing its booming cyberwarfare business. The current director of national intelligence is a former Booz Allen executive, notes BloombergBusinessweek.
Booz Allen has lent its vaunted brainpower to the government since 1940, when it helped the Navy come up with a plan for hunting German submarines. It’s now involved in everything from the tracking of foreign gang leaders for immigration enforcers to systems administration for the NSA. Nearly half of its 24,500-strong workforce has a Top Secret security clearance (another 28% are cleared for merely Secret info.)
Despite the pain dealt by the current budget sequester to public services and federal employees, government consulting remains hugely lucrative for Booz Allen (which boasts of industry-leading margins) as well as its many competitors. For instance, while revenue was down 1.7 percent in the recently completed fiscal year amid fiscal austerity, operating income rose 15 percent in the wake of 1,500 layoffs that included 500 consultants, many of them senior and well-paid. Management has taken the meat cleaver to overhead in other ways too, boosting margins. This year, compensation will be an area of focus yet again with organic revenue expected to be down some 5 percent while earnings per share are forecast by the company to creep higher.
Over its 99-year history, Booz Allen has transitioned from a partnership to an independent corporation and now, finally, a private-equity subsidiary following its 2008 buyout by the Carlyle Group. At that time, Booz Allen’s commercial and overseas business was spun off, and the rest was re-listed two years later, though Carlyle retains two-thirds of the shares and absolute control over decision-making.
The stock has underperformed, though the $1.1 billion in extraordinary dividends Carlyle ordered paid chiefly to itself last year with borrowed money assured a positive return since its IPO. More impressively, shares rallied 40 percent in the seven weeks leading up to the quarterly and annual results reported May 22 and, despite all the publicity surrounding Snowden, remain just 7 percent off that high. The report confirmed that the sequester’s threat to contractor profits and future revenue was vastly overblown.
From a shareholder perspective, Booz Allen’s willingness to cut senior staff and overhead in defense of profits is certainly a plus, as is the potential that Carlyle will pay itself another big dividend with borrowed money. The downside is that it could also enjoy a nice payday by selling more of its stake, which has already produced a return of more than 200 percent since 2008. Carlyle is playing with house money at this point, while new buyers are taking the risk of a depressing equity offering as well as the debt incurred to pay last year’s ransom in dividends.
So despite the promise of the cyber warfare and cloud capabilities Booz Allen is now marketing not just to Uncle Sam but also to Mideast governments and US banks and energy producers, resist the urge to buy the “Snowden dip.” Booz Allen is an investment that works best for senior insiders and their paymasters at Carlyle. Everyone else is dispensable. Security risk is just one of the risks of this security.