06/11/2013 10:14 am ET

Booz Allen's Top-Secret Profit Machine


Bloomberg View:

Psst, here's a stock tip for you. There's a company near Washington with strong ties to the U.S. intelligence community that has been around for almost a century and has secret ways of making money -- so secret that the company can't tell you what they are. Investors who buy just need to have faith.

To skeptics, this might seem like a pitch for an investment scam. But as anyone who has been paying attention to the news might have guessed, the company is Booz Allen Hamilton Holding Corp.

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Booz Allen is the government contractor that employed Edward Snowden when he leaked a trove of secret documents about National Security Agency surveillance programs to the U.K.'s Guardian newspaper and the Washington Post. The consulting company, based in McLean, Virginia, is upfront about the ways in which its silence creates risks for shareholders. It derives 99 percent of its revenue from the U.S. government and says a substantial portion of its contracts are classified.

"Because we are limited in our ability to provide information about these contracts and services," the company said in its latest annual report, "you may not have important information concerning our business, which will limit your insight into a substantial portion of our business, and therefore may be less able to fully evaluate the risks related to that portion of our business."

This seems like it would be a dream arrangement for some corporations: Not only is Booz Allen allowed to keep investors uninformed, it's required to. I suppose we should give the company credit for being transparent about how opaque it is.
Booz Allen shares were down 4 percent to $17.35 this afternoon, a bit higher than what they sold for when the company held its initial public offering in November 2010. About two thirds of Booz Allen's shares are owned by the Washington-based private-equity firm Carlyle Group LP. The company had net income of $219 million on revenue of $5.8 billion in the year ended March 31. It has a stock market value of $2.5 billion.

Booz Allen predicted something like this might happen. "Employee or subcontractor misconduct could also involve the improper use of our clients' sensitive or classified information," the company said in its annual report. "It is not always possible to deter employee or subcontractor misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses, which could materially harm our business."

No kidding. One question on a lot of people's minds is how a 29-year-old consultant could have access to so much secret information at the NSA. Don't expect Booz Allen to volunteer much insight. My guess is that the information is classified.

We often hear about conflicts that arise between the First Amendment right of the press to report the news and the government's obligation to protect citizens. There also is a powerful tension between the government's demands for secrecy and investors' need for important information about companies with publicly held securities.

Last week, for instance, Slate carried an article under this headline: "How PRISM could ruin Apple, Google, and every other big tech company." Although I'm not convinced that the companies are doomed, I have no doubt that their cooperation with the NSA creates significant risks for shareholders.

How are the companies supposed to explain these risks? They probably can't, at least not in any meaningful sense. U.S. securities rules prohibit companies from filing any disclosures with the Securities and Exchange Commission that contain classified information.

There's no easy solution here, aside from the obvious point that the government keeps way too many secrets. It's just another risk that investors need to keep in mind: Even if a company is required to disclose material information publicly, that doesn't mean it will be allowed to do so.

(Jonathan Weil is a columnist for Bloomberg View. Follow him on Twitter.)



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