Booz Allen's IPO: Heyday or doomsday?

It couldn't have been long before the critics came out of the woodwork. There was sure to be some backlash to Booz Allen's IPO announcement on Monday. I came across this great article by business columnist Steven Pearlstein. Pearlstein points out that the Booz Allen deal has already been a lucrative one for the Carlyle Group (which now owns 80 percent of the company)—to date, Carlyle has earned a return of over 100 percent on its investment, and Booz Allen's revenue has increased over 40 percent in the two years since it was sold.

He commends BAH's internal corporate culture and solid footing in the public sector market, and chalks it all up to the fact that the firm has been privately held all along, which means that its leaders didn't have to kowtow to the self interests of public investors. In the 1970s, the company conducted a brief experiment in going public, but soon realized that "the demands of public shareholders were inconsistent with both its business model and its partnership culture." As such, it quickly changed its mind and resumed its private status. Pearlstein believes that the firm will encounter these same issues this time around. He is skeptical that the firm will be able to maintain its unique culture and long-term visions in the face of shareholder pressure. He states:

"At some point, the growth in the government-contracting sector will slow, or a contract will blow up, or the company will need to make a costly investment to achieve its next increment of growth. And that will be the moment when Shrader or his successor will find that what comes first is not the customer, or the employees, or the culture, but the imperative of delivering double-digit earnings growth to investors quarter after quarter after quarter."

And here, his real doomsday prediction: "At that point, Booz Allen will become just like all the others -- good, but no longer great -- desperate to meet its earnings targets by chasing after low-margin contracts or buying up mid-size competitors. And while that might satisfy Wall Street, the Pentagon is discovering that that kind of growth-driven consolidation has done little to lower costs or improve quality, while hollowing out the middle of the market where much of cutting-edge innovation used to take place."

Perhaps it is skeptics like Pearlstein, plus reminders of its successful legacy as a private firm, that will help Booz Allen keep its head on straight as it ventures into new territory. We all know what the alternative would look like.