Month: March 2006

The World is Flatulent

So I went to my first outsourcing conference this week in New York after five years. If I hear one more reference to Mr. Friedman's book, I'm going to start to become disrespectful. Can we please move on to the next pop business fad? There was even an Indian offshore company raffling off the book as a giveaway at their exhibit table.

I have to admit the offshore phenomenon has thrown a wild curve into what used to be an apple pie, all-American business. When you got outsourced by EDS, CSC, or IBM, a Democrat might have lost their job to a Republican, but that was about the end of the political strife. It's a whole different ball game today. I'm exploring my conscience on this one. I haven't read Friedman's book, but I did break down and buy it this week. I hope I find some answers there; but my gut is telling me we're headed for a stormy season in rationalizing why this is a good development in our industry. Am I alone here? Am I missing the big picture?

I think I may be missing something because serendipitously, I sat at the conference (twice, in fact) next to this really well dressed, attractive guy. Now, please understand, really well dressed, attractive guys almost never go to outsourcing conferences (unless they work for a vendor like Oracle or IBM or something). The guy looked Ivy League or like he lived in Connecticut– you know the type. Glancing at his badge, I saw that he was from GAP (General Atlantic Partners), the venture capital firm. Of course, that made sense. When I saw him the second time, I had to ask him why he was at the conference. He told me he was there because one of his companies was presenting, Genpact. In fact, GAP has made investments in two large Indian offshore firms, the other being Patni. He told me he did work in Stamford and that he works with Jim Madden, who as you should remember, was CEO of Exult, another GAP company that was sold to Hewitt, which is a GAP company. Madden is now at GAP.

The bottom line is. I always take my clues from the smart money. If GAP is invested in India, then the offshore thing is not going away. I guess it's like I tell my 9-year old son when he doesn't like a particular outcome or development, "Deal." I feel like I'm reacting (albeit internally) the same way my 9-year old reacts.

Internet Professional Services Redux

So, it seems Robert Pickering is rocking the Casbah in Western Europe. Another old pal of mine, Richard Holway (a demi-god in UK IT Services), sent me a note yesterday, informing me that Robert had just announced an agreement March 21st to merge his company,LBIcon with Framfab. This announcement really moved me. As many of you know, I veered away from the traditional outsourcing market to start tracking the Internet professional services firms in 1999. I published an exhaustive study (300 pages) on the top 30 firms and their capabilities. Of course, we know what happened to Scient, Zefer, iXL… (As a matter of fact, I received a class action suit notice yesterday in the mail against iXL. I didn't even know I bought iXL stock. Whatever.) Nonetheless, Sapient survived. I listened to CEO Jerry Greenberg's session at Greg Gould's (Goldman Sachs) Technology Conference a couple weeks ago. And I hear Digitas is doing very well. There are a host of others in this space that are doing really interesting work. Richard's company (Ovum) had very promising things to say about Robert's new merged company. They've not chosen a name yet. He joked they should call it, "March 21st" (referencing the rollup king, "March 1st" in the same space). I told him "Veritage" was available.

This market excites me. It rocks; it's sexy. The hot air blew out of it 5 years ago. What's left are serious companies who are using the mature benefits of internet technology to advance their clients' businesses.

Here is what Ovum published on the merger:

10:10 LB Icon and Framfab to merge
Douglas Hayward
LB Icon and Framfab this morning said they had agreed to merge to form a pan-European new-media services specialist with pro-forma sales (in 2005) of €149m, making the new company by far the biggest independent new-media specialist in Europe. The two companies provide a range of web design and digital-marketing services to companies, including many blue-chip corporations.
The merger is expected to complete by July 2006, and LB Icon's shareholders will hold a majority of shares. Robert Pickering, CEO of LB Icon, will be CEO of the combined group, which will be listed on the Stockholm exchange and the Euronext exchange in Amsterdam. Sven Skarendahl, chairman of Framfab, will be chairman of the new company.
The UK will be the largest subsidiary, with 32% of sales, followed by Germany (21%), Benelux (16%), the Nordics (14%), Spain (5%) and Italy (3%). The US will account for 9% of sales.
The two companies gave a number of reasons for the merger, including: customer demand for geographical reach, supplier consolidation by clients, the need to attract and retain staff, and of course cost and revenue synergies. The two companies said they expected the merger to be EPS-enhancing in the 2007 financial year. The combined company had pro-forma FY 2005 EBIT margin of just under 9%.
Comment: We may comment further tomorrow. For now, it's worth noting that the two dotcom survivors clearly see the need to combine, not just to gain efficiencies by positioning themselves against new competition. We've recently seen growing interest in this space from IT services players, including Sapient and Accenture, to name but two. This is a nice defensible niche, combining media creativity and deep domain knowledge of marketing-related issues, but that defensibility makes it attractive to new entrants.
The new company (no name has yet been chosen) has the opportunity to establish itself as the dominant pan-European brand in this niche. It's got a blind spot in France, where it doesn't play yet, and it could be bigger in Germany. We'd expect Pickering to buy into France and to expand the Germany operation by bolt-on acquisition in H2 this year, following the official merger.
Can it create significant barriers to entry? This is difficult in a people industry. But this is a market that combines people-centric creativity with technology and analytic skills (the latter is important in analysing and improving clients' new-media marketing operations), so it's not "just" a people business.
The big risk is that LB Icon handles the integration badly, alienating staff and/or customers, or gets too bureaucratic. The latter is unlikely, as I think the country operations will have a lot of autonomy. A bigger threat might be the failure to get the promised revenue synergies. It also faces the threat of marketing consultancies and IT services players eating its lunch. But LB Icon and Framfab are survivors par excellence in a market that went through dreadful times after the dotcom boom, so they stand an excellent chance of puling this off.

Class Wars

There are a lot of rumors floating out there suggesting why the merger imploded. Interestingly, many are pointing the finger at EquaTerra– alleging that EquaTerra is unprofitable, has performance issues and debt problems on some major contracts. Now granted, I've been AWOL for a spell in this market, but I found it highly unusual that TPI, whose reputation has always been the epitome of inflexibility and well, ahem (nous parlons la vérité ici), arrogance– was looking innocent and victimized in some way. Huh? First of all. I have pretty solid information that EquaTerra is not unprofitable and there are no debt issues/repayments or credits being made to unsatisfied clients there. Whether or not there are performance problems on specific deals, who knows? Show me an advisor/vendor that doesn't have a dissatisfied client in the portfolio. That doesn't surprise me. What does surprise me is this spiraling negative spin in the market against EquaTerra. Where is it coming from? What is the motivation behind it?

As for as the intricacies behind the breakdown of the deal, our understanding (and we're pretty confident here) is that the deal finally broke down over distribution of equity on the part of the private equity class investors. For some of the terms and conditions to change the way some of the investors wanted it, TPI recognized it would create problems– they knew the combined company would ultimately fail if they moved forward under the PE investor's scenario. Remember, Monitor Clipper Partners (MCP) had the lion's share of the deal, as they are the owners of TPI (important fact). Oak Investment Partners could have equally been difficult, but certainly had a fraction of MCP's interest. Our calculated guess is it was MCP that was the final coagulant in the deal and forced the hemorrhaging.

So, in the end, as I was getting closer to what actually happened in that last week– leading up to what I believe to be an amateurish, unprofessional dis-engagement in the form of their hostile breakup release, I started feeling sorry for the principals of both firms. Even Denny. Who still hasn't returned my inquiries on this. On the one hand, it started getting very complicated to follow how these M&A transactions work with their preferred positions in the stock and their investor rights, etc. On the other hand, I started to feel like this was a private affair and I really shouldn't be meddling in their business. (Weird. I really felt that way.)

So what does it all mean? Not much. The question that remains is what will TPI (read: MCP) do now? Where will they go from here? TPI can't pull off an IPO on their own without more bench strength. EquaTerra is a young company. Their options are more varied. Their greatest challenge right now appears to be an image problem. That's fixable. The wild card is MCP. Interesting. What do you think?

Happy Birthday Surprise

So today is my birthday, and I'm out doing birthday fun things. I get a surprise call on my cell phone that the TPI-Equaterra (n'er to be Veritage) merger has been terminated today. I opted not to drop everything and scramble to make phone calls, but I did make a few. One source said it best, "Personalities clashing over every issue from future strategy to who drives the bus." Another source said it was valuation that was the final culprit.

I'll snoop around more on Monday. We'll try to do a follow up on the online version of GITS. I'll also print something more in-depth here.

Veritage story went to the printer

The Veritage story is out.  It went to the printer yesterday. You'll have to have a subscription to GITS if you want to read it.

I had a great chat yesterday with an old friend and source whom I suppose would like to remain anonymous. He suggested I elevate the discussion for this site to focus on what's truly innovative in the market, rather than covering the usual who's doing what in the market. It has some interesting possibilities.