Why Booz Allen's Shares Soared

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of consultancy Booz Allen Hamilton (NYS: BAH) had a big bounce today, gaining as much as 18% in intraday trading after the company said that it may offer a hefty special dividend to shareholders.

So what: In a regulatory filing today, Booz Allen said it's looking into refinancing its current credit facilities. No big deal right? What's gotten investors all riled up, though, is that the consultant may raise more than it needs to cover its current debt, combine that with its cash on hand, and pay investors a $1 billion special dividend.

Now what: While I love dividends in general, I'm not much of a fan of debt-funded special dividends. Furthermore, since Booz Allen has only been on the public markets for a couple of years, this potential move didn't make a whole lot of sense to me. That is, until I remembered that private-equity giant Carlyle Group owns about three-quarters of Booz Allen. While company management teams are usually loath to take on a whole bunch of new debt to pay a dividend, this is a classic private-equity move.

So if you're not Carlyle, is this a development to be cheered? I wouldn't be crazy about it -- Booz Allen already supports a fairly sizeable debt load, and while I wouldn't be currently worried about the company's ability to meet its obligations, the more debt a company carries, the riskier that company becomes for equity holders. That said, current shareholders should already be aware that Carlyle owns most of the company, so they shouldn't be particularly shocked that it's being managed like it's majority-owned by a private-equity company.

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