2.6 The formal process for selecting a strategic partner began on 8 March 2002 with an advertisement in the Financial Times, which attracted significant press coverage and which UBS Warburg drew to the attention of its investor network. The sale process began with interested bidders submitting written applications to receive a Pre-Qualification Questionnaire (PQQ). 40 PQQs were requested by the closing date of 15 March 2002 and 16 were subsequently returned by 22 March 2002. SERCO were the only trade bidder, although two other bidders proposed the involvement of trade investors: WS Atkins bid as part of the Carlyle Consortium and the Science Applications International Corporation (SAIC) had expressed an interest in joining the Charterhouse bid.
2.7 The PQQs were evaluated by the Department and UBS Warburg against pre-agreed criteria. They were also evaluated by the QinetiQ Board who expressed serious reservations about the involvement of trade bidders; the Board believed that they would have different objectives from the purely financial investors and would not achieve full value at the flotation. In addition, the Board was concerned about there being possible conflicts of interest throughout the sale process from negotiating with competitors. The Department approved the elimination of four parties on 15 April 2002. The Department decided, against the wishes of the Board, to include the Carlyle and Charterhouse consortia in the next phase of the process but eliminated SERCO on the grounds that their response was weaker.
2.8 Keeping as many credible bidders in the field as is feasible at the early phase improves competition. The proposal from SERCO was the only response that did not involve a private equity firm. There may have been advantages to retaining a different type of bidder in the competition: a trade bidder would have been likely to require a lower rate of return, have a different view on the value of the business, and potentially offer a higher price that would improve competition amongst the bidders. The Department believed that a trade bidder would create conflicts of interest, in terms of the ability to maintain the independence of QinetiQ's advice, that would need to be managed and took the view that SERCO's response did not address these concerns adequately. It also believed that the need for SERCO shareholders to approve the proposal added additional risk. We consider that more could have been done to work with SERCO at this early stage of the process to allow them to strengthen their proposal.
2.9 On 23 April 2002 the Department issued an information memorandum to the remaining 12 bidders and requested indicative bids setting out the Enterprise Value21 of QinetiQ to be submitted by 22 May 2002. Seven indicative bids were received and these valued QinetiQ within the range of £450 million to £600 million, subject to deductions for debt in the business. All the potential partners submitted bids to purchase 51 per cent of QinetiQ in conflict with the Department's aim of retaining a majority stake. The five investors who chose not to submit bids gave reasons consistent with the Department's concerns when ruling out an early flotation (paragraph 1.27).
2.10 The Department had intended to shortlist six of the seven bidders but subsequently decided to take forward a shortlist of four. It evaluated the indicative bids with UBS Warburg, with input from the QinetiQ Board. Advice prepared by UBS Warburg concluded that three of the seven bidders were not strong enough to be taken forward to the next round. The Department decided on 23 May 2002 to shortlist Carlyle, Permira, Goldman Sachs, and Candover; this decision was approved by the Treasury on 27 May 2002. Our analysis of the three eliminated bids concluded that they were not as strong as the four shortlisted bidders but that they were strong enough to be included in an expanded shortlist. The Department and UBS Warburg do not accept our conclusion and do not believe an analysis of the bids carried out five years after the deal can accurately reflect all the considerations at the time. Our expert panel considers that there was a strong case for taking forward more bids at this stage given the complexity of the business and uncertainty over significant contracts (see paragraph 2.25). In our view it is likely that an expanded list would have improved competition and potentially avoided the eventual outcome of receiving only one bid that was acceptable to the Department. The Department has said it was concerned that bidders would have been discouraged from carrying out extensive due diligence if the shortlist had been greater than four and did not want to overburden QinetiQ management, who had expressed reservations about managing more than four bidders. It was also concerned about potential calls to refund bid costs if a larger shortlist was taken forward.
2.11 On 8 July 2002 the Department invited the remaining bidders to submit bids on the basis of purchasing both 51 and 35 per cent of QinetiQ. Carlyle and Permira submitted the only compliant final bids on 15 July 2002 following due diligence that had highlighted the expected capital expenditure under the Long Term Partnering Agreement. Carlyle submitted a conditional bid that now valued the business at £350 million before adjustments. Permira valued the business within the range of £325-£350 million before adjustments but submitted a highly conditional bid that had greater risk attached. Permira proposed to submit a binding bid following further due diligence, on the basis that they could immediately appoint a new chairman to carry out a strategic review and develop a new business plan. In addition, they also proposed the introduction of a new investment partner.
2.12 The two final bids were evaluated by the Department and UBS Warburg with input from the QinetiQ Board. The Department decided to seek revised final bids from Carlyle and Permira, with the aim of receiving an increased offer and reducing conditionality. Carlyle and Permira both submitted revised final offers on 16 August 2002. Carlyle offered an increased value of £374 million before adjustments. Permira introduced Candover as their new equity partner but the conditions of their original offer remained the same, including the value they assigned to the business. Carlyle were then appointed preferred bidder with a bid to purchase 35 per cent of QinetiQ.
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21 The total value of a business irrespective of the levels of debt and equity.