MOD and QinetiQ

Since 2001, QinetiQ has been transformed from MOD's in-house research and development organisation into an international defence and security company. It was successfully floated on the stock market in February 2006 as a FTSE 250 company. Since 2003, the value of the company has grown around 8.5 times.

The UK's defence and security interests have been safeguarded throughout the privatisation process. When DERA was separated to form Dstl and QinetiQ, Dstl was created to house those capabilities which the MOD believed should not be transferred to the private sector, including but not limited to work which is politically sensitive and directly supports certain sensitive military operations. The Government also holds a special share in QinetiQ itself.

The taxpayer has benefited by nearly £830m from the privatisation of QinetiQ, the majority of which has been retained for reinvestment in the defence programme.

The transformation of DERA

In 1998, MOD's in-house research laboratories, the Defence Evaluation and Research Agency (DERA) employing over 12,000 staff, faced an uncertain future due to declining funding and increasing civil sector competition. To address these issues, the Strategic Defence Review of the same year committed MOD to a Private Public Partnership (PPP) approach for the future, announcing its intention to "harness the opportunities offered by a public private partnership to strengthen the Defence Evaluation & Research Agency’s ability to continue to provide world class scientific research well into the next century".

The aim of the PPP was subsequently set out in the public consultation document as being to:

  • enhance the opportunity for the exploitation of technology locked up in DERA

  • improve access to technologies from the civil sector for military application

  • introduce private capital into DERA to meet its investment needs, and thereby accelerate its development through exposure to private sector disciplines; and

  • provide increased freedoms for DERA in, for example, employee terms; conditions; reward; and its ability to grow commercial business

By these means, MOD concluded that DERA would be better equipped to continue to provide the capability that MOD requires, and to deal with the consequences of the falling defence research budget and the increasing competition for advice, technology support, and research for MOD. Without the capital and the freedoms offered by the PPP, MOD concluded that DERA would decline as a force in science and technology over the longer term. The Government recognised that this would not be in the best interests of the nation’s future security or of the taxpayer.

"Throughout the PPP process we have remained committed
to the objective of ensuring the best possible future for DERA
and for defence science and technology. We have consulted 
widely; listening and responding to the views of our
stakeholders. We now have a way forward which is good for
DERA, the MOD and the wider UK economy….. Our approach
will offer value for money to the taxpayer whilst ensuring that
our armed forces retain access to leading edge technology. It
will provide a stimulus for the exploitation of science within
the wider UK economy strengthening the links between civil
and defence technology.

Secretary of State for Defence Geoff Hoon, July 2000

A strategic partnership

In July 2001, QinetiQ plc was formed from the majority of DERA. Although flotation on the stock market was the preferred option for the PPP, market conditions were not right at the time and QinetiQ lacked a commercial track record. Consequently, MOD decided to seek a strategic partner to invest in QinetiQ and to support the company's growth and development.

In February 2003, following an open competition involving a number of interested bidders, MOD sold around 35% of QinetiQ to The Carlyle Group (one of the world's largest Private Equity firms). The taxpayer received about £150m from this transaction (including the sale of the shares and the repayment of debt in the business).

"I believe that this is a good result for the taxpayer, QinetiQ, its staff and its MOD customers. We now look forward to a period of strategic partnership with The Carlyle Group culminating in the sale of our remaining stake in the company. Whilst the precise timing and choice of transaction route will depend on value for money considerations, I anticipate that the sale will occur through a flotation of QinetiQ in around 3-5 years."

Under Secretary of State for Defence Dr. Lewis Mooney, February 2003

Carlyle subsequently worked closely with management to grow the value of the QinetiQ business and help it expand into new markets, particularly in the US. At this stage, MOD retained the majority of shares specifically to ensure that the taxpayer would benefit from future growth.

A FTSE 250 company is born

In August 2005, MOD, Carlyle and QinetiQ appointed joint financial advisers to advise on possible options for the future of QinetiQ. Following receipt of the city experts' advice, including on market conditions and maximising value for the taxpayer, and after a period of preparation, QinetiQ was successfully floated on the London Stock Exchange on 10 February 2006. This float - or initial public offering (IPO) - raised approximately £360m for the taxpayer, £250m of which was reinvested in defence.

"This deal is an excellent result for the taxpayer, for the Armed Forces and for the British economy. This successful partnership between Government and business has sustained highly-skilled British jobs, whilst supporting the need of our Armed Forces to access the very best of international research and technology.

Minister for Defence Procurement Lord Drayson, February 2006

Completing the process

On 9 September 2008, the MOD sold its remaining 19% shareholding in QinetiQ, raising a further £254m (net of costs) for the taxpayer. The shares were valued at 206p per share, compared with an average price since flotation of 194p. Commenting on the sale the Minister for Defence Equipment and Support Baroness Taylor said:

"I am pleased to announce that with this sale of shares in QinetiQ we have now completed the final stage of the privatisation.

Ten years ago our in-house defence laboratories faced a difficult and uncertain future. The privatisation of QinetiQ has transformed it into a successful British-based company employing around 13,000 people, and raised £830m for the taxpayer.

QinetiQ and its staff can be rightly proud of what the company has achieved since it was created in 2001. They remain a very important supplier to the MOD and we wish them every success."

Incentivising growth

A share option scheme was introduced in 2003 to incentivise employees to increase the value of the company. All employees were given a small allocation of free shares and all staff were given the opportunity to purchase equity as part of a "co-investment" scheme. Employees could have invested between £500 and £20,000 according to their role in QinetiQ. Gains made by QinetiQ senior managers were directly linked to the growth in the value of the business, which in turn has been driven by the significant improvement in the performance of the company.

Between 2003 and 2006, the value of QinetiQ grew 8.5 times. Although management and Carlyle have made substantial rewards as a result, it is the taxpayer who has undoubtedly gained most as the result of the government's decision to sell only a minority of the shares in 2003.

The future

QinetiQ will continue to operate a Compliance Regime which will enable it to provide the Government with impartial defence-related advice. The number of MOD contracts competed by defence suppliers has increased in recent years, though the MOD does not, and has no intention to, impose any ceiling on the amount of work which QinetiQ is eligible to undertake for it.

The Government continues to holds a special share in QinetiQ which is independent of any financial shareholding. This allows the Government to veto any transaction or shareholding that may result in unacceptable ownership, influence or control contrary to UK defence and security interests.

Key Facts

1995 : Defence Evaluation and Research Agency (DERA) formed as part of a continuing consolidation of MOD's in house science and technology capabilities.

1998 : As part of the Strategic Defence Review the Government announces a Public Private Partnership (PPP) as best way to address challenges facing DERA.

1999/2000 : Extensive public consultation on possible PPP models.

2001 : QinetiQ created as a new government-owned company out of 75% of DERA.

2002 : Following competition, MOD selects The Carlyle Group as its preferred strategic partner to help develop QinetiQ.

2003 : Carlyle acquires a 37.5% stake in QinetiQ. The sale raises approximately £150m for the taxpayer (repayment of debt and sale of shares).

2006 : QinetiQ successfully floated on the London Stock Exchange as new British-based FTSE 250 company - raising around £360m for the taxpayer.

2007 : MOD currently retains an approximately 19% stake in QinetiQ – valued at around £250m.

QinetiQ Timeline

1991 - Defence Research Agency created by amalgamating the various defence research laboratories & Sir John Chisholm appointed Chief Executive.

1993 - DRA became a trading fund.

1995 - DRA renamed Defence Evaluation and Research Agency (DERA) following merger with MOD's test and evaluation facilities.

1998 - Strategic Defence Review announced Public Private Partnership (PPP) for DERA.

2001 - QinetiQ vested as a 100% Government-owned company (formed from ¾ of DERA).  Those activities considered inappropriate for transfer to the private sector remained within the trading fund, renamed Dstl.

2002 - Following an open competition, MOD selected Carlyle (a private equity investor) as its strategic partner in QinetiQ.

2003 - Feb:PPP deal completed with Carlyle.  MOD announced intention to sell its remaining stake within 3-5 years, most likely by way of a flotation on the stock market.

2005 - Aug:MOD, Carlyle and QinetiQ jointly appointed investment banks to prepare the company for a possible IPO.

2006 - 10 Feb:QinetiQ successfully floated on the London Stock Exchange, raising approximately £360m for the taxpayer.

2008 - 9 Sept:MOD successfully sold its remaining shareholding in QinetiQ raising a further £254m (net of costs) for the taxpayer.

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