It Services Firms Find Gold in
dot-com shakeout
by John Ribeiro, IDG News Service\Bangalore Bureau
January 30, 2001, 19:42
The declines in technology stocks on the Nasdaq stock market, and
the overall waning of investor confidence in information technology
companies, is turning into a windfall for some IT services companies
that see a way of acquiring smaller, ailing companies at basement
prices.
Although it has grown its business organically until now,
Denver-based systems integrator Tanning Technology Corp. is
planning acquisitions to take advantage of the low valuations of a
large number of IT services companies. "Many companies -- both
dot-coms and services companies -- are going to go out of business
because of the thirst for capital to fuel their growth," Larry Tanning,
chairman of the board, president, and chief executive officer of
Tanning Technology, told IDG News Service.
Houston-based Compaq Computer Corp. is also counting on
acquisitions to help expand its Global Services business. "One year
ago, the valuations of the various companies we might have looked at
were too high for us to be serious about an acquisition," said Jeffrey
Lynn, vice president and general manager of Compaq Global Services.
Some analysts see consolidation ahead in the services business.
"Some of the larger companies are acquiring smaller companies just to
get the people -- because it is tough getting good people these days
-- or in some cases (for) the client base as well," said Ed Yourdon,
chairman of the Cutter Consortium, an Arlington,
Massachusetts-based research and consultancy firm.
"Some of the smaller consultancy firms are struggling for business," he
added. "A lot of them were frustrated that they didn't manage to get
on to this tidal wave of everybody getting rich a year or two ago, and
so they might be willing to sell just because they are tired, or
because they see that they just don't have the resources to expand
their niche."
Most of the deals are likely to be in cash, however, rather than stock.
"The people being acquired may be less willing to be acquired for
stock than they were before when the market was high," added
Yourdon. "The depressed stock prices cuts both ways. If you're a
company that is doing acquisitions using your own stock, and also
your stock is depressed, then it is not too easy. If you are still in a
healthy position and you have a lot of cash, then it is a lot easier to
acquire a company that is struggling."
Although Tanning's stock price took a beating on the Nasdaq, it is a
debt-free company with about $80 million in cash. It is well positioned
as a systems integrator that helps large global customers integrate
their businesses with the Internet. "I think the time is ripe for us to
be proactive for the right acquisitions, whether it is to expand
geographies, vertical markets, or horizontal market skills," Tanning
said. "We have run our company on a cash-positive managed basis,
so that we have plenty of capital to fuel our growth, our
acquisitions."
Compaq's acquisitions are designed to help expand its services
revenue. "Right now services is about 17 percent of Compaq's total
revenue, and our chairman has asked us to grow that to about 30
percent ... as quickly as we possibly can," Lynn said. "We will do it
both through natural growth of the services business and also
through acquisitions."
Besides acquisitions that will improve Compaq's reach in regions
including Europe and North America, Compaq also hopes to buy
companies for skills that fit with its services strategy, such as in the
area of 3G (third-generation) mobile deployment, according to Lynn.
In some instances, Compaq may also retain the brands of companies
it acquires, he added.
Indian services companies too are looking for easy pickings overseas.
The majority earn most of their revenue from the U.S. and European
markets. "The valuations today are far more attractive than they
were a couple of years ago," said Byanna Ramaswamy, president and
managing director of Bangalore-based consulting and software
services company Sonata Software. "We are looking at acquiring in
the U.S. and Europe both services companies and companies that
have products whose implementation requires a great deal of
customization. In either case, the main objective is market access."
Sonata announced in December last year that it was investing $2
million for a 26 percent stake in SpinAway Inc., a San Mateo,
California-based e-business systems integrator, with the option to
enhance its stake at a later stage. "When we did the valuation of
SpinAway, it was far more realistic than at the peak of the stock
market boom," Ramaswamy said.
Apprehensions about recession in the U.S. economy and slower
growth in IT spending in the U.S. may, however, put the brakes on
acquisitions. "(The acquisitions) will be tempered at least in the U.S.
by the kind of defensive postures that a lot of these IT firms have
right now," Yourdon said. "They want to see which way the economy
is going, and when is the IT marketplace going to start buying stuff
again. There is no point in buying a company if its products or
services are not being purchased."
In addition, growth by acquisition in the services business is fraught
with risks, according to Ashok Trivedi, co-chairman and president of
iGate Capital Corp. of Pittsburgh, a holding company for a number of
e-services companies. "We have done a number of acquisitions, but in
a people-oriented business like services, the one thing you have to
ensure is that you are able to carry the people with you," Trivedi
said. "You may expect to get access to customers through an
acquisition, but as the services business is very relationship-based, if
you lose the manager handling the account, you may lose the
customer, too."
Tanning Technology can be reached at tanning.com.
Compaq can be reached at compaq.com. iGate Capital
can be reached at igatecapital.com. Sonata Software
can be reached at sonata-software.com |
