Summary
'The
Privatisation of QinetiQ’ (HC 52) examines whether the privatisation of the
defence technology business QinetiQ was a good deal for the taxpayer. QinetiQ
was created out of the Defence Evaluation and Research Agency (DERA) in 2001,
specifically to allow the majority of DERA's activities to be privatised.
In 2003 a minority stake in the business (33.8%) was sold to a
strategic partner, Carlyle Group, and 3.7% was sold to management and
employees. Carlyle and the Ministry of Defence (MoD) used share incentives to
align their interests and to incentivise management to increase the value of
the business. The MoD did not want management to make very large returns purely
as a result of the privatisation but it accepted that management could make
significant sums of money if this was linked to the growth in the value of the
business.
The structure of the deal gave QinetiQ an equity value of £125
million. This increased to £1.3 billion between the 2003 sale and the 2006
stock market flotation due to improved business performance, expansion into the
US defence market and the UK civil market. The value of the shares of the top
ten managers at flotation was £107 million from an initial investment of
£537,250.
The National Audit Office (NAO) believes the returns in this
case exceeded what was necessary to incentivise management to deliver growth in
the value of the business. Although privatisation has realised some £800
million for the taxpayer, net of costs, the NAO considers that more money could
have been raised from the sale. However, it praises the business strategy that
increased the value of QinetiQ and maximised the proceeds at flotation.
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