Nov. 23 (Bloomberg) -- The U.K. government mishandled the sale of defense research group Qinetiq Plc, allowing U.S. private equity group Carlyle Group to pay a low price for its share and giving a ``mind-boggling'' reward to management, auditors and lawmakers said.

The Ministry of Defense sold a 31 percent share of Qinetiq to Carlyle for 42 million pounds ($87 million) in 2002. That stake was worth 374 million pounds when Qinetiq sold shares to the public for the first time in February 2006.

While the government made 576 million pounds, the National Audit Office estimates it could have made ``tens of millions'' more had it not allowed Carlyle to exploit its preferred bidder status to negotiate down the price of its stake. Qinetiq, based in London, designs products including body scanners to computers that help helicopters land on warships.

``The department went on to sell a larger share of the business for less money than they initially agreed,'' Edward Leigh, the Conservative chairman of Parliament's Public Accounts Committee, said in a statement. ``Compare this with the rewards for Qinetiq's top managers, who won the jackpot. They got a mind-boggling return of almost 20,000 percent on their investments.''

The government-spending watchdog criticized the share option plan for the 10 most senior managers. All previously government employees, they invested 540,000 pounds in the company. Their shares were worth 107 million pounds when Qinetiq stock was sold to the public.

Shares

Qinetiq shares have fallen a fifth since the initial public offering, compared with a gain of 8 percent in the FTSE All- Share Index. The stock was trading at 173.25 pence at 12:15 p.m. today.

Washington-based Carlyle, the world's second-biggest buyout firm, sold its stake in Qinetiq in February. The U.K. government remains the largest shareholder, with a 19 percent stake.

The audit office said the government was wrong to let Qinetiq's management discuss their potential compensation package with Carlyle before it was named as the preferred bidder. It recommended the government ensure it received good advice when negotiating with private equity companies.

``You have to be aware and have experienced professional people who know how to deal with private equity,'' Patricia Leahy, who was in charge of the audit, told reporters at a briefing yesterday in London. ``We don't want to single Carlyle out. This was a private equity deal, and this is how they do deals.''

Carlyle refused to comment on the report. Qinetiq said in a statement it welcomed it.

Future in Doubt

``At the time when Qinetiq was being auctioned in 2002 its future was far from assured,'' the company said in an e-mailed statement. ``The NAO records that between 2003 and 2006 Qinetiq's management and staff overcame these challenges and drove a 36 percent increase in revenues and 261 percent increase in operating profits.''

Defence Minister Ann Taylor said in a statement the public share sale had been a ``overall success.''

The company has expanded and changed it product line since the public offering. Orders for technological products such as body scanners and unmanned aircraft have helped to make up for a declining share of U.K. spending on military research, which is increasingly open to competition. The company gets about 25 percent of annual sales from North America and wants to double that amount.

Sales rose to 1.1 billion pounds in the year through March 2007 from 795 million pounds in the year through March 2004, the first full year after Carlyle took its stake. Net profit rose to 69 million pounds from 43 million pounds over the same period.

The government sold shares to institutional investors at 200 pence each. In its first week of trading, the stock reached 219.75 pence.

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net.

Last Updated: November 23, 2007 07:31 EST