Crony Capitalism Goes Global
The Conexant deal illustrates the extraordinary mix of business acumen and contacts that makes Carlyle tick. Carlyle's entry into wireless is being led by William Kennard, who regulated the wireless industry as chairman of the Federal Communications Commission before being hired as managing director of Carlyle's global telecommunications group. Carlyle's investment will help Conexant expand its already sizable market in China, where its wireless division recently won approval to supply a key cell-phone technology to state-owned China Unicom, the second-largest telecom provider in the world's largest wireless market. In a convenient twist, China Unicom's national network is operated by Canada's Nortel Networks under a contract signed during a visit to Beijing by Carlucci, who was Nortel's chairman from 2000 to 2001.
A classic example of how Carlyle's political connections work was the Pentagon's decision last year to develop United Defense's Crusader mobile artillery system. The decision to fund the Crusader, which could eventually cost $11 billion, came after years of strenuous objections from senior military planners, who said it was outdated, too heavy and of little use in contemporary warfare. But United Defense's modifications to the system--and a lobbying campaign by a handful of lawmakers who received a total of $300,000 in donations from a United Defense political action committee--apparently made the difference.
Then came September 11 and its aftermath. With the Crusader contract in hand and President Bush's war in Afghanistan well under way, Carlyle decided the time was ripe to sell some of its United Defense holdings on the stock market. The initial public offering on December 14 raised $237 million for Carlyle. In January United Defense, whose board of directors includes Carlucci and John Shalikashvili, former chairman of the Joint Chiefs of Staff, said its fourth-quarter profits had risen 62 percent, due in large part to sales of the Crusader, which received $472 million in the Pentagon's latest budget.
Those events raised a few eyebrows, particularly at a time when the media were dishing out daily revelations about Enron's political influence in Washington. Columnist Paul Krugman described the Pentagon's policy switch on the Crusader as a "very nice gift" from Rumsfeld to Carlucci, whom Rumsfeld brought into government, and an example of "crony capitalism," the Asian model of capitalism scorned by US economists and the International Monetary Fund [for more on Carlucci, see "Company Man" at www.thenation.com]. Conway, who is chairman of United Defense, scoffed at the speculation. "Frank [Carlucci] is not going to lobby somebody in the Defense Department about a program for Carlyle," he said. As for the timing of the IPO, which was organized after the hijack attacks, "no one wants to be a beneficiary of September 11," he said.
Friends in High Places
Bush Sr., who chairs the annual meeting of Carlyle's Asian Advisory Board, has not hesitated to communicate with his son regarding policies that could affect Carlyle and other US investors in the region--particularly South Korea, where Carlyle could soon have an investment stake of more than $2 billion. Last spring, after President Bush stuck a knife in Kim Dae Jung's sunshine policies by saying North Korea couldn't be trusted, Bush Sr. sent the President a memo written by Donald Gregg, his former National Security Adviser who once served as CIA station chief in Seoul, urging the new Administration to ease its hard-line policies.
A few weeks later, in a decision the New York Times described as "the first concrete evidence of the elder Bush's hand in a specific policy arena," George W. said he was willing to talk to the North "anytime, anyplace." But the President's "axis of evil" speech on January 29, which North Korea took to be a near-declaration of war, ended any hopes of rapprochement and led Pyongyang to cancel a February visit by Gregg and several other former diplomats. Bush Jr. tried to soften his rhetoric during his late February visit to Seoul but was met instead by the largest anti-American demonstrations of his career. Conway, however, was sanguine about the investment climate in Korea. Bush's axis speech "doesn't add to my level of concern," he said.
In Europe, Carlyle's strategy is to invest in companies seeking to become Europewide and global players. Conway, who attends the annual meetings of the European board, which are chaired by Britain's Major, described the advisory boards as an expansive process where advisers strategize about how to create and nurture companies with a global reach. At the last meeting of the European board, the consensus was that "all these companies that have been more single-country companies are going to have to expand onto the European stage and ultimately a global stage," he said. "Frankly, if they don't, they'll have a tough time competing with the Americans and the Asians." To implement the strategy, Carlyle acquired and combined three companies, from Italy, Germany and the United States; in another case, it combined two German and Canadian auto firms.
In buying Bofors, Carlyle and United Defense crossed into an extremely sensitive policy area. To smooth the process, a member of Carlyle's European board "helped us on that even though it was an acquisition by a US company of a Swedish company," said Conway. "Most people, when you talk about defense assets, tend to get a little bit sensitive, just as we do in this country."
Sensitivity is one lesson Carlyle has learned the hard way. Last September, less than three weeks after the attacks on the twin towers and the Pentagon, the Wall Street Journal disclosed that the bin Laden family of Saudi Arabia had committed at least $2 million to one of Carlyle's funds. Carlyle quickly returned the money. Conway, in the bank's first public comments on the incident, said the decision to part ways with the bin Ladens was made at the senior partnership level. "Anything that had the word bin Laden in it, you just didn't want to be associated with it," he said. "Its not that the people we were dealing with had done anything wrong." But in the end, "we said, 'Gee whiz, we'll buy you out at fair market value and get on with our life.'"