2.1 In early 2002, having decided not to proceed directly to a flotation, the Department was concerned that any loss of momentum in the PPP process could undermine staff morale, damage customer relationships and restrict QinetiQ's commercial freedom at a key stage in its development. Following a review of options, the Department elected to bring in a strategic partner to develop the business in advance of a flotation. It considered that waiting for more favourable market conditions before pursuing an investor would be damaging to QinetiQ.
2.2 The Department believed that the introduction of a strategic partner would assist in developing the business, provide access to private capital to help fund growth and allow QinetiQ to develop a commercial track record in advance of a flotation. Sir John Egan, QinetiQ's chairman at the time, was unhappy with the prospect of the introduction of a strategic partner. He told us that the poor markets presented an opportunity to get the business in shape ahead of privatisation and could not see what value could be added by private equity houses or the trade partners who were likely to bid. Sir John Chisholm, who was the chief executive at the time, was also concerned about the impact of an outside investor on the future direction of the business. He told us that he had also raised concerns about the potential risk of management making large returns from the involvement of a private equity investor. The Department concluded that it would be appropriate to sell only a minority shareholding to a strategic partner thereby allowing the Department to realise the majority of any future financial gains.