*****1/31/97 EDITION OF IBD-NEW AMERICA SECTION*******
NICE BUYS Computer Consultant Follows
Different Acquisition Strategy
Date: 1/31/97
Author: Matt Krantz
The phrase, ''growth through acquisition'' is almost a cliche among
emerging firms. So it's no shock that fast-expanding Cotelligent Group Inc.
grows this way.
But the San Francisco-based firm, which sells computer advice, does
things differently.
Cotelligent, which went public in February, doesn't bulldoze existing
management after it acquires a firm. Current managers instead are given
Cotelligent stock options as bait to stay.
And Cotelligent hasn't even changed the names of the firms it's bought.
But wait. Isn't Cotelligent kissing off the great perk of acquisitions: cutting
overhead?
No, because Cotelligent's in the computer consulting business - it installs
and designs computer systems for other firms.
It's an industry where personal bonds with clients are still the best way to
win bids for projects. And in a business where people's knowledge is the
firm's biggest asset, retaining current management can stop brain drain,
analysts say.
Only finance, marketing, planning and administrative support are
centralized and shared between the firms as they're acquired.
Keeping the acquired units intact makes Cotelligent stand out in a merger-
prone industry. The number of mergers and acquisitions of information
technology firms rose 26% to 1,962 last year, according to a study by Fort
Lee, N.J.-based Broadview Associates.
''We founded Cotelligent because local and regional leaders are the
toughest competitors (in computer consulting),'' said James Lavelle,
Cotelligent's chairman and chief executive. ''That's still the case today, as
close relationships with clients are as important as ever.''
Cotelligent, which did $99.4 million in sales during the nine months ended
Dec. 31, is a federation of eight regional consulting firms. Its
consolidatation strategy is similar to how WMX Technologies Inc. and
Browning-Ferris Industries Inc. unified small garbage collectors.
Operational decisions, such as choosing what types of clients to target and
deciding how consulting will be done is still handled by the local firms.
That's key to keeping repeat business. More than 80% of Cotelligent's
revenues come from clients that hired it the prior year.
Cotelligent is not in a buy-or-die situation like some other emerging
companies that count on acquisitions.
''We'll grow at a comfortable rate internally, we don't have to buy other
firms,'' said Dan Jackson, the firm's chief financial officer.
The existing firms, exclusive of any acquisitions, will deliver nearly 30%
revenue growth going forward, Lavelle says.
Officials at the firm will not disclose acquisition plans. However, Cotelligent
is expected to buy two more firms this fiscal year ending in March,
according to analysts at Volpe, Welty & Co.
But so far, there's been a pattern to Cotelligent's buying.
''None of the companies we've bought were for sale when we sat down
and became acquainted,'' Lavelle said. ''We're looking for owners that
aren't ready to walk away from their businesses.''
Second, Cotelligent has never bought two firms in the same city. That's so
the Cotelligent can extend its national reach, Lavelle says.
''As we expand our network geographically by acquiring other companies,
all the firms can tell clients they can serve them nationally, not just in the
local market,'' Lavelle said.
Competition is fierce in the computer consulting business. Cotelligent often
bids against the consulting arms of the Big Six accounting firms.
Giant competitors such as Electronic Data Systems Corp. and Computer
Sciences Corp. also cross its path. That doesn't include the hundreds of
small firms in the local markets.
But the market's big enough for everyone. Firms around the world will
spend $683 billion on information-technology products, up 12% from the
prior year, according to International Data Corp. in Framingham, Mass.
Analysts expect Cotelligent to earn 67 cents a share by the fiscal year
ended March '97 and 92 cents the next year.
The firm earned $4.6 million, or 49 cents a share, during the nine months
ended Dec. 31 on a pro forma basis. That's up 16% from the same year
ago period.
Cotelligent, which trades by the symbol COTL, sells for around 20.
WMX TECHNOLOGIES, INC.
COMPUTER SCIENCES CORP.
(C) Copyright 1997 Investors Business Daily, Inc.
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