Nathan Vardi , writing on Forbes.com (and in the print edition dated August 3, 2009) ((NB: the print and on-line versions are not identical)), provides some detail on the current state of military outsourcing, and how, apparently, the relationship between two long-term friends and business partners fell apart when one shut the other out of a multi-million dollar payday.
Fire Fight/The Business of War recounts the formation of investment firm Veritas by Robert McKeon and Thomas Campbell.
In the early 1990’s, McKeon started Veritas Capital; Campbell joined him sometime thereafter.
By 1996, when they had raised $175 million for Veritas’ first private equity fund, McKeon and Campbell had taken an interest in military suppliers. To run their fund they formed a management company, with McKeon holding 62.5% and Campbell 37.5%. After some profitable defense deals they raised another $153 million fund in 2002 and split the general partnership the same way; their biggest backer was Credit Suisse ( CS – news – people ). For help navigating the defense bureaucracy, Veritas created an advisory board that included retired generals such as Barry R. McCaffrey and Anthony C. Zinni.
Vardi, in describing a 19-year relationship between McKeon and Campbell during which they vacationed together, traveled together, and had a weekly dinner – with no guests – at Harry Cipriani ((New Yorkers, and visitors, of certain social classes will recognize this as the name of a very expensive, high-status restaurant. )) Vardi reports that
They golfed together, went skeet and trap shooting, traveled together for meetings and once shared a hotel room in Mexico. [Emphasis supplied]
That this is worthy of note is in and of itself interesting. First, McKeon and Campbell were, at least some of the time, traveling on other people’s money, which they were entrusted with for investment purposes. Second, it says something about the expectations of CEOs and investment bankers that this would be regarded as a sacrifice. (Lincoln sometimes shared a bed while traveling, even after he was elected president). Third – and more damning – these men and their investors were making millions of dollars providing support services to troops who often didn’t get to sleep in a bed – much less a private hotel room.
From Vardi’s account:
Then they hit pay dirt. On the eve of the Iraq war DynCorp, the legacy of two aviation-support firms formed in 1946 that provided depot-level repairs for the Air Force, had become a government contractor known as much for its information technology work as its paramilitary services. Computer Sciences Corp. ( CSC – news – people ) bought the company for $622 million in 2003, but the data processing firm clearly didn’t know what to make of DynCorp’s military support businesses.
Veritas did. McKeon and Campbell had made a killing buying Raytheon Aerospace, a provider of maintenance services for military aircraft, renaming it Vertex and selling it for $650 million to L-3 Communications. “Follow the plane, because wherever the plane goes you want to touch all aspects of it,” says Campbell, explaining the logic of such deals. “The parallel for DynCorp was follow the soldier, because behind every military individual is a long supply line.” He and McKeon swooped in the moment DynCorp’s nondata services business went up for sale. Campbell flew down to Fort Worth, Tex. to dig through the company’s books and contracts. He discovered that Computer Sciences’ offering memo was undervaluing the assets. McKeon struck a deal in fall 2004 to buy those assets for $850 million. But in the time it took for the transaction to close, investment banks like Goldman Sachs ( GS – news – people
) took a look at Campbell’s and McKeon’s assessment of their target and came to a startling conclusion: Veritas could quickly make five times its money by taking DynCorp public after closing and squeezing out a dividend equal to its original investment, court documents say.
….
As the conflicts in Iraq and Afghanistan boomed, DynCorp prospered. These days 53% of its revenue comes from the battlefields. Last year DynCorp’s 51%-owned joint venture secured a $4.6 billion multiyear contract to supply 9,100 linguists to translate for U.S. soldiers in Iraq. Amid a worldwide recession, that contract helped boost DynCorp’s revenues by 45% in the year ended Apr. 3, when the company earned $70 million on $3.1 billion of revenue and had paid down its debt, to $600 million.
Litigation between cKeon and Campbell, according to Forbes, is pending.