Examination of Witnesses (Questions 140-159)
MINISTRY OF DEFENCE, SHAREHOLDER EXECUTIVE & QUINTEQ
3 DECEMBER 2007
Q140 Mr Mitchell: But it also put money in your own pocket. Did you want that increased from 10% to 20%?
Sir John Chisholm: Indeed I did, in order to bring more people from QinetiQ into the scheme. After all, in that increase from 10% to 20% 5% of that was to do with staff in general being able to purchase shares or get shares through options.
Q141 Mr Mitchell: Okay, so it is purely incidental that you made a lot of money out of it. Let me just turn to the department because, according to paragraph 4.18 the department: "had given assurances to the House of Commons Defence Committee that it did not want to see individuals becoming instantly rich simply by virtue of the privatisation". Well, of course, that might have led them to wait two or three weeks before becoming instantly rich but you did not seriously mean that.
Mr Jeffrey: This relates to some evidence that the then Defence Procurement Minister gave to the Defence Committee in 2001, and what she said was, "I do not want to see anyone become millionaires overnight simply by virtue of DERA being privatised". She went on to say though, "Should people prosper because the organisation prospers, that is a different matter".
Q142 Mr Mitchell: So in fact they did become pretty rich but not instantly?
Mr Jeffrey: Depending on the performance of the company and although the Committee might feel that the chances of failure were slight, as Sir John has said, it was still the case that if they had grown the company by less than 20% they would have lost their money.
Q143 Mr Mitchell: Okay. Let me pursue with you, Mr Jeffrey, the odd way in which the estimated value of the company fluctuated. In March 2002 Pricewaterhouse, an honourable firm, and, of course, accountants always give a true and fair view of assets and obligations, estimated the book value at £534 million. By late 2002 that was down to £312 million. I think KPMG had taken over by that stage, and, of course, both PwC and KPMG are big players in the privatisation game, so they have got an interest in manipulating the price, have they not? That was £312 million excluding debt, but just slightly later we got another estimate, and this is in the minutes, of £312 million including debt, the same but the debts have suddenly been included. That was down in January 2003 to an equity value of £125 million, and then by 2006, after privatisation, it is up to £1.3 billion. How do you account for those insane fluctuations?
Mr Jeffrey: I think the earlier ones that you quote, Mr Mitchell, illustrate how hard it is to value assets of this kind in a vacuum, as it were. There is an interesting quote from the NAO's own consultants in a footnote to the Report when they in a sense give a health warning as regards their own post-hoc valuations when they say, "Value can only be truly determined in an open market. Valuation of companies is a matter of judgment which is impacted by the valuer's interpretation of available information, prevailing market sentiment and other factors, including, but not limited to, the quality of management".
Q144 Mr Mitchell: So the accountants are saying you cannot estimate the value of a company in the public sector?
Mr Jeffrey: I think over that earlier period what was happening was that successive valuations by consultants were varying widely. This was partly to do with the inherent difficulty of valuing something that was still embedded in the public sector and partly to do with changes in market conditions. That was one of the factors, I judged, that led the department to opt for the sale of a minority rather than moving to immediate full privatisation.
Q145 Mr Mitchell: You were relying on these valuations of auditors with an interest in privatisation who, you now tell us, could not accurately estimate the value of a company in the public sector. That is what you are saying, is it not?
Mr Jeffrey: I am saying that they were the best estimates that people had available to them.
Q146 Mr Mitchell: And they kept coming constantly down.
Mr Jeffrey: But the fact that you are able, as you are, to quote such widely varying estimates illustrates that this is by no means an exact science and in the end only the market can value assets of this kind.
Q147 Mr Mitchell: Let us ask Sir John. There has been an astronomical increase since then to £1.3 billion. Mr Davidson was attempting to establish why this has happened. Presumably that is just because the market has changed, largely because of the fact that we have had a series of wars.
Sir John Chisholm: Yes. What has happened is that the company is very different indeed now from what it was then.
Ms Diggle: Yes, but the increase in value is not so much due to your efforts and those of the management who were committed to it as to the fact that we have got bloody wars on.
Sir John Chisholm: The company did not change all by itself. The company changed because the management, together with Carlyle, conceived a very appropriate strategy and pursued it with vigour and great success.
Q148 Mr Mitchell: When it came to enriching the management you proposed the top ten people who were going to get the richest rewards and the top 245 who were going to get slightly less. How did you pick them? Who was left out of this bonanza?
Sir John Chisholm: The issue was how could people contribute to the potential growth of the company. That was the question: what were they able to bring to bear and how could they best be incentivised? Just to be clear, the question of the incentive scheme was wholly a matter for Carlyle. It was their incentive scheme.
Q149 Mr Mitchell: Yes, but you had nominated the people. That gives you a judgment superior in a sense to the Archangel Gabriel because he is admitting people to heaven. You are admitting them to wealth, riches now.
Sir John Chisholm: Mr Mitchell, at the time there was no sense of wealth and riches, frankly. There was a considerable sense of risk.
Ms Diggle: Oh, well, the top management made a return of £107 million out of a fairly small investment.
Sir John Chisholm: Of course, if you had told me that at the time I would have been gobsmacked.
Q150 Mr Mitchell: They were quite enthusiastic about putting their money forward. Did anybody not put it forward?
Sir John Chisholm: Yes.
Q151 Mr Mitchell: How many?
Sir John Chisholm: I cannot give you the exact number.
Q152 Mr Mitchell: Can you remember how many people were excluded from the 245?
Sir John Chisholm: How many people were excluded from the 245?
Q153 Mr Mitchell: Yes, the 245 people who got the lower stratum of rewards.
Sir John Chisholm: Those were the people who were in the broader management team.
Q154 Mr Mitchell: So everybody in that broader management team got it?
Sir John Chisholm: Everybody who—
Q155 Mr Mitchell: Everybody you approved of or what?
Sir John Chisholm: No, everyone in the broader management team—
Q156 Mr Mitchell: Got it?
Sir John Chisholm:— were offered it. Not everybody in that team took it up.
Q157 Mr Mitchell: Mr Jeffrey, Carlyle are private equity people. We are taught not to love private equity in the Labour Party. I do not know what your position on private equity is. Certainly they do not publish accounts so we do not exactly know what is going on. Are there any doubts about Carlyle, as an American firm which does not publish accounts, being involved in this way?
Mr Jeffrey: I do not have a personal view on private equity one way or the other, Mr Mitchell. All I can say is that at the time it was perfectly consistent with the Government's policy for us to involve a private equity firm of that sort as a strategic partner in order to grow the QinetiQ business.
Q158 Mr Mitchell: But the Government felt at the time that it did not want defence producers to take this on and yet Carlyle has other defence interests.
Mr Jeffrey: It may do but it is—
Q159 Mr Mitchell: Do you know what it has?
Mr Jeffrey: Its interest in this particular privatisation was quite specific to QinetiQ and its intention was clearly always to exit when it had achieved the growth in value. The reason that the decision was taken not to favour other defence contractors was that it was thought that there was a risk of conflict and that if it turned out to be in their interests because there were synergies between their business and the QinetiQ business—
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