Yesterday's news, announced initially in a report from the Associated Press, that Xe Services, formerly known as Blackwater, is being put up for sale tempts me to modify the old cliché, when the going gets tough, the tough sell out. Of course, I don't really believe that. In fact, it would be grossly unfair.
There is a lot to be said about Blackwater and yes, much of it is unflattering, and a fair amount of that is true. But it is also true that over the years that much of what has been said and written about Blackwater and other private security contractors is grossly inaccurate, biased, misleading, and legally libelous, i.e. jackbooted thugs, mercenaries, Christian crusaders, et cetera.
Someday, a dispassionate and objective reporter or academic will sift through the mountains of paperwork that are doubtlessly stored in various government archives and give us a real history of how Blackwater operated, what contracts it had, who it worked for, what its people did right and wrong. To date we don't have this; only hysterical screeds masquerading as investigative reporting.
At this point a lot of questions remain unanswered. It's not clear if all of Blackwater's branches are up for sale or just its security and training business. One of the most lucrative parts, Presidential Airways, was sold earlier this year for $200 million.
Also unknown is what will happen to Blackwater's contracts for the CIA and the Joint Special Operations Command. Jeremy Scahill of The Nation writes that, "Prince has shifted some of Blackwater's clandestine work to companies he does not own but which are run by former Blackwater executives or allies. Among these are Blackbird Technologies, which now employs former Blackwater executive J. Cofer Black (former head of the CIA's Counterterrorism Center) and Constellation Consulting, which is run by former Blackwater executive Enrique "Ric" Prado, a veteran of the CIA's paramilitary division, the Special Operations Group." And it unclear whether Blackwater will seek to sell its remaining parts as a package or a la carte.
Another interesting question is who might buy Blackwater? CNN reports that:
With most of Xe's revenue dependent upon a few large public entities that are subject to public pressure, its future contracts and revenues can easily be threatened, notes Aswath Damodaran, a professor of finance at NYU's Stern School of Business. "If I ran a public company, I would not touch Blackwater with a ten-foot pole," he said. "The danger to my other businesses from contamination would be way too high.
One exception would be a large strategic buyer that is engaged in similar high-risk fields and that could find value in subsuming Xe Services into its ranks. For instance, DynCorp (DCP), which had over $3 billion in revenue in 2009 and just reported more than $1 billion in quarterly revenue, is an active competitor in Xe Services' main business areas. Buying Xe Services would further increase DynCorp's manpower and give the company access to additional contracts, such as the lucrative DOD narcotics intervention contract, for which it was not pre-qualified.
The Carlyle Group, which owns several defense contractors, including United Defense Industries, could be a buyer. But Cerberus [see below for more on Cerberus], with $23 billion under management, seems to fit the bill especially nicely. Since it plans to take control of DynCorp, and already runs IAP Worldwide, which provides logistical support for the Pentagon, Cerberus will have a deep bench of capable management at its disposal.
What can we learn from the news? For starters, like it or not, dealing with the media is a critical part of your work. Companies that don't answer questions quickly and fully allow critics to get away with making all sorts of wild charges which are endlessly repeated in the echo chamber known as the Internet. Admittedly, this is not always the fault of the companies. Many contracts stipulate that queries about a company's work can only be answered by the client, which is often the U.S. government, and it is not anxious to answer questions. Still, the no comment policy only hurts companies and they need to be far more active in engaging with the media.
As an example of why this is important consider, as MarketWatch reported that two years ago, Cerberus Capital Management turned down a chance to invest in the company when it was still called Blackwater. Though no reason was given, it was speculated that the reclusive private-equity firm shied away from the unwanted attention that would have come with such a purchase.
Given that Cerberus is now in the process of acquiring DynCorp International, another private military and security contractor, it couldn't have been the prospect of acquiring such a firm in and of itself that bothered Cerberus. Rather it was Blackwater's reputation.
A corollary to this is that rebranding doesn't work. As we all know Blackwater changed its name in the aftermath of the September 2007 incident in which Blackwater contractors killed 17 Iraqi civilians at Nisoor Square in Baghdad during a firefight. By that time, rightly or wrongly, Blackwater was widely viewed as a sort of corporate pig. The name change was seen as putting lipstick on a swine. It did not help. Xe Services was still seen as Blackwater.
Another lesson is that companies really need to have a business model from the very beginning. It was always a bit unclear what was Erik Prince's [Blackwater's founder] real motivation was. Yes, to be sure, it was to make money. But he had scads of money to begin with. Many thought that he simply thought it was a cool thing to do. That may be fine for an Internet startup but when you are talking about a company involved in military issues, as in periodically killing people and destroying things, you need to be as serious as a heart attack.
Finally, Blackwater/Xe Services or whatever it is called in the future is unlikely to be filing for Chapter 7 relief. It simply is too important to the U.S. government and holds too many contracts worth a lot of money. That alone guarantees someone will be buying it, even if the government has to provide an incentive.
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