Sludge Watch ==> Synagro's new home: Carlyle Group - a commentary

[Maureen Reilly]

Sludgewatch Admin:

So what does this mean that Synagro has been acquired by the Carlyle Group?
People sure have some strong feelings (and not good feelings) about this 
international powerhouse.


Wikipedia has a pretty thorough description of the firm:
http://en.wikipedia.org/wiki/Carlyle_Group

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http://www.redherring.com/Article.aspx?a=6793&hed=Carlyle's+Way#

Carlyle's Way

Making a mint inside "the iron triangle" of defense, government and 
industry.
December 11, 2001

Like everyone else in the United States, the group stood transfixed as the 
events of September 11 unfolded. Present were former secretary of defense 
Frank Carlucci, former secretary of state James Baker III, and 
representatives of the bin Laden family. This was not some underground 
presidential bunker or Central Intelligence Agency interrogation room. It 
was the Ritz-Carlton in Washington, D.C., the plush setting for the annual 
investor conference of one of the most powerful, well-connected, and 
secretive companies in the world: the Carlyle Group. And since September 11, 
this little-known company has become unexpectedly important.

That the Carlyle Group had its conference on America's darkest day was mere 
coincidence, but there is nothing accidental about the cast of characters 
that this private-equity powerhouse has assembled in the 14 years since its 
founding. Among those associated with Carlyle are former U.S. president 
George Bush Sr., former U.K. prime minister John Major, and former president 
of the Philippines Fidel Ramos. And Carlyle has counted George Soros, Prince 
Alwaleed bin Talal bin Abdul Aziz Alsaud of Saudi Arabia, and Osama bin 
Laden's estranged family among its high-profile clientele. The group has 
been able to parlay its political clout into a lucrative buyout practice (in 
other words, purchasing struggling companies, turning them around, and 
selling them for huge profits)--everything from defense contractors to 
telecommunications and aerospace companies. It is a kind of ruthless 
investing made popular by the movie Wall Street, and any industry that 
relies heavily on government regulation is fair game for Carlyle's brand of 
access capitalism. Carlyle has established itself as the gatekeeper between 
private business interests and U.S. defense spending. And as the Carlyle 
investors watched the World Trade towers go down, the group's prospects went 
up.


In running what its own marketing literature spookily calls "a vast, 
interlocking, global network of businesses and investment professionals" 
that operates within the so-called iron triangle of industry, government, 
and the military, the Carlyle Group leaves itself open to any number of 
conflicts of interest and stunning ironies. For example, it is hard to 
ignore the fact that Osama bin Laden's family members, who renounced their 
son ten years ago, stood to gain financially from the war being waged 
against him until late October, when public criticism of the relationship 
forced them to liquidate their holdings in the firm. Or consider that U.S. 
president George W. Bush is in a position to make budgetary decisions that 
could pad his father's bank account. But for the Carlyle Group, walking that 
narrow line is the art of doing business at the murky intersection of 
Washington politics, national security, and private capital; mastering it 
has enabled the group to amass $12 billion in funds under management. But 
while successful in the traditional private-equity avenue of corporate 
buyouts, Carlyle has recently set its sites on venture capital with less 
success. The firm is finding that all the politicians in the world won't 
help it identify an emerging technology or a winning business model.

Surprisingly, Carlyle has avoided the fertile VC market in defense 
technology, which now, more than ever, comes from smaller companies hoping 
to cash in on what the defense establishment calls the revolution in 
military affairs, or RMA.  Thus far, Carlyle has passed up on these emerging 
technologies in favor of some truly awful Internet plays. And despite its 
unique qualifications for early-stage funding of defense companies, the firm 
seems to have no appetite for the sector.

Despite its VC troubles, however, the Carlyle Group's core business is set 
for some good times ahead. Though the group has raised eyebrows on Capitol 
Hill in the past, the firm's close ties with the current administration and 
its cozy relationship with several prominent Saudi government figures has 
the watchdogs howling. And it's those same connections that will keep 
Carlyle in the black for as long as the war against terrorism endures.

For the 11th-largest defense contractor in the United States, wartime is 
boom time. No one knows that better than the Carlyle Group, which less than 
a month after U.S. troops began bombing Afghanistan filed to take public its 
crown jewel of defense, United Defense, a company it has owned for nearly a 
decade. That this company is even able to go public is testament to the 
Carlyle Group's pull in Washington.

United Defense makes the controversial Crusader, a 42-ton, self-propelled 
howitzer that moves and operates much like a tank and can lob ten 155-mm 
shells per minute as far as 40 kilometers. The Crusader has been in the 
sights of Pentagon budget cutters since the Clinton administration, which 
argued that it was a relic of the cold war era--too heavy and slow for 
today's warfare. Even the Pentagon had recommended the program be 
discontinued. But remarkably, the $11 billion contract for the Crusader is 
still alive, thanks largely to the Carlyle Group.

"This is very much an example of a cold war-inspired weapon whose time has 
passed," notes Steve Grundman, a consultant at Charles River Associates, a 
defense and aerospace consultancy in Boston. "Its liabilities were uncovered 
during the Kosovo campaign, when the Army was unable to deploy it in time. 
It is exceedingly expensive, and it was a wake-up call to the Army that many 
of its forces are no longer relevant."

But the Carlyle Group was having none of that. While it is impossible to say 
what U.S. secretary of defense Donald Rumsfeld was thinking when he made the 
decision to keep the Crusader program alive, people close to the situation 
claim to have a pretty good idea. Mr. Carlucci and Mr. Rumsfeld are good 
friends and former wrestling partners from their undergraduate days at 
Princeton University. And while Carlyle executives are quick to reject any 
accusations of them lobbying the current administration, others aren't so 
sure. "In this particular effort, I felt that they were like any other 
lobbying group, apart from the fact that they are not," said one Washington, 
D.C., lobbyist with intimate knowledge of the Crusader negotiations, noting 
the fine line between lobbying and having a drink with a old friend.

According to Greg McCarthy, a spokesperson for Representative J.C. Watts Jr. 
(R: Oklahoma), whose district is home to one of the Crusader's assembly 
plants, the Carlyle Group's influence was indeed felt at the Pentagon. 
"Carlyle's strength was within the DoD, because as a rule someone like Frank 
Carlucci is going to have access," says Mr. McCarthy. "But they have other 
staff types that work behind the scenes, in the dark, that know everything 
about the Army and Capitol Hill."

Perhaps even more disconcerting than Carlyle's ties to the Pentagon are its 
connections within the White House itself. Aside from signing up George Bush 
Sr. shortly after his presidential term ended, Carlyle gave George W. Bush a 
job on the board of Texas-based airline food caterer Caterair International 
back in 1991. Since Bush the younger took office this year, a number of 
events have raised eyebrows.

Shortly after George W. Bush was sworn in as president, he broke off talks 
with North Korea regarding long-range ballistic missiles, claiming there was 
no way to ensure North Korea would comply with any guidelines that were 
developed. The news came as a shock to South Korean officials, who had spent 
years negotiating with the North, assisted by the Clinton administration. By 
June, Mr. Bush had reopened negotiations with North Korea, but only at the 
urging of his own father. According to reports, the former president sent 
his son a memo persuasively arguing the need to work with the North Korean 
government. It was the first time the nation had seen the influence of the 
father on the son in office.

But what has been overlooked was Carlyle's business interest in Korea. The 
senior Bush had spearheaded the group's successful entrance into the South 
Korean market, paving the way for buyouts of Korea's KorAm Bank and Mercury, 
a telecommunications equipment company. For the business to be successful, 
stability between North and South Korea is critical. And though there is no 
direct evidence linking the senior Bush's business dealings in Korea with 
the change in policy, it is the appearance of impropriety that excites the 
watchdogs. "We are clearly aware that former President Bush has weighed in 
on policy toward South Korea and we note that U.S. policy changed after 
those communications," says Peter Eisner, managing director at the Center 
for Public Integrity, a watchdog group in Washington, D.C., which has an 
active file on the Carlyle Group. "We know that former President Bush 
receives remuneration for his work with Carlyle and that he is capable of 
advising the current president, but how much further it goes, we don't 
know."

While the Center for Public Integrity looks for its smoking gun, others in 
Washington say hard evidence is unimportant. "Whether the decisions made by 
the former president are a real or apparent conflict of interest doesn't 
matter, because in the public's eye they're equally as damaging," says Larry 
Noble, executive director and general counsel of the Center for Responsive 
Politics. "Bush [Sr.] has to seriously consider the propriety of sitting on 
the board of a group that is impacted by his son's decisions."

And the controversy is expected only to increase as Carlyle's investments in 
Saudi Arabia are scrutinized during the war on terrorism. Mr. Eisner says 
that very little is known about Carlyle's involvements in Saudi Arabia, 
except that the firm has been making close to $50 million a year training 
the Saudi Arabian National Guard, troops that are sworn to protect the 
monarchy. Carlyle also advises the Saudi royal family on the Economic Offset 
Program, a system that is designed to encourage foreign businesses to open 
shop in Saudi Arabia and uses re-investment incentives to keep those 
businesses' proceeds in the country.

But the money flowing out of Saudi Arabia and into the Carlyle Group is of 
even more interest. Immediately after the September 11 attacks, reports 
surfaced of Carlyle's involvement with the Saudi Binladin Group, the $5 
billion construction business run by Osama's half-brother Bakr. The bin 
Laden family invested $2 million in the Carlyle Partners II fund, which 
includes in its portfolio United Defense and other defense and aerospace 
companies. On October 26, the Carlyle Group severed its relationship with 
the bin Laden family in what officials termed a mutual decision. Mr. Bush 
Sr. and Mr. Major have been to Saudi Arabia on behalf of Carlyle as recently 
as last year, and according to reports, the Federal Bureau of Investigation 
is currently looking into the flow of money from the bin Laden family. 
Carlyle officials declined to answer any questions regarding their 
activities in Saudi Arabia.

But for all the questions, Carlyle has stayed clean in the eyes of the law. 
Lobbying laws in Washington, D.C., are ambiguous at best, requiring only 
that former politicians observe a one-year "cooling-off period" before they 
reënter the lobbying scene on behalf of industry. It is playing within this 
gray area that has given the Carlyle Group some of the best returns in the 
business.

After David Rubenstein, a former aide in the Carter administration, and 
William Conway Jr., former chief financial officer of MCI Communications, 
hooked up at New York's Carlyle hotel in 1987 to form the company, the 
Carlyle Group spent two lost years investing in a hodgepodge of companies. 
It wasn't until 1989, when the company brought in Mr. Carlucci, fresh off 
his two-year stint as U.S. secretary of defense, that Carlyle got serious in 
government. In 1991 the company made a name for itself by facilitating a 
$590 million purchase of Citicorp stock for Prince Alwaleed bin Talal. 
Shortly thereafter, Carlyle snatched up defense contractors Harsco, BDM 
International, and LTV, turning the companies around and selling them to the 
likes of TRW, Boeing, and Lockheed Martin.

The Carlyle Group has diversified its holdings since then, investing in 
everything from bottling companies to natural-food grocers. In the process, 
it has become one of the biggest, most successful private-equity firms in 
business, with annualized returns of 35 percent. (Judging by the early 
numbers from some of their funds, however, like many other private-equity 
funds, 2001 will be a considerably less profitable year for Carlyle.) "They 
are the new breed of private equity, acting more like a large mutual fund of 
private companies," says David Snow, editor of PrivateEquityCentral.net, a 
Web site that tracks private-equity firms. The numbers are impressive: 
Carlyle employs 240 people, as opposed to the 10 or 12 typical of most 
private-equity firms. It has ownership stakes in 164 companies, which 
collectively employ more than 70,000 people. George Soros invested $100 
million in the group's funds; the California Public Employees' Retirement 
System is in for $305 million.

Carlyle has succeeded by raising money first, then finding the talent to 
manage it. For instance, it raised a fund for buying out telecom companies 
and hired William Kennard, the former U.S. Federal Communications Commission 
chairman, to run it. Accused early on of being nothing more than a bunch of 
Washington grip-and-grinners, Carlyle has proven its critics wrong. At a 
Salomon Smith Barney private-equity conference last March, a panel of 
professional investment managers were asked who the best fund managers are. 
Carlyle cofounder Mr. Conway was one of two managers chosen.

With its size and success, questions about the firm's ability to grow 
revenue has arisen. Carlyle has placed its bets for future growth on the VC 
markets, which it entered in 1996. But to date, it has found that venture 
capital is a game with far different rules than that of corporate buyouts. 
"They may be very established in private equity, but it seems to me that 
they don't really know the venture capital business," says one VC who has 
done deals with Carlyle. "In buyouts, you take over a company and fight the 
management, but in venture capital it's the opposite. You want to work with 
people."

Carlyle executives admit as much. As a result, the Carlyle Europe Venture 
Partners fund has been slow to commit its capital. So far, it has spent just 
more than 20 percent of its $660 million, and 3 of its original 17 
investments have already folded. None has gone public or been acquired. As 
Jack Biddle, cofounder of Novak Biddle Venture Partners, dryly puts it, "I 
haven't been involved in a lot of venture deals where the participation of a 
president mattered that much. In venture capital, it's all about the 
technology."

For a firm that has made its money in highly regulated, politically charged 
industries, picking business-to-business plays is hardly second nature. 
While Carlyle has investments in highly regulated sectors like telecom and 
banking, it has avoided defense entirely, instead focusing on tech 
industries that have already gone flat. The firm's European fund alone 
boasts six B2B companies, two optical-networking companies, and Riot-E, a 
wireless media play. Jacques Garaïalde, managing director of the Europe fund 
concedes that expectations have been shifted. "Clearly, we can't make 100 
times returns on B2B, but there are some situations in which we can make 3 
times."

But the struggles in its VC business may be offset, at least temporarily, by 
the expected windfall from the war on terrorism. The federal government has 
already approved a $40 billion supplemental aid package to the current 
budget, $19 billion of which is headed straight to the Pentagon. Some of the 
additional government spending is likely to find its way into Carlyle's 
coffers.

The Bush administration isn't afraid to mix business and politics, and no 
other firm embodies that penchant better than the Carlyle Group. Walking 
that fine line is what Carlyle does best. We may not see Osama bin Laden's 
brothers at Carlyle's investor conferences any more, but business will go on 
as usual for the biggest old boys network around. As Mr. Snow puts it, 
"Carlyle will always have to defend itself and will never be able to 
convince certain people that they aren't capable of forging murky backroom 
deals. George Bush's father does profit when the Carlyle Group profits, but 
to make the leap that the president would base decisions on that is to say 
that the president is corrupt."

Additional reporting by Lawrence Aragon, Mark Chediak, Julie Landry, 
Christopher Locke, Eric Moskowitz, Mark Mowrey, and Michael Parsons.