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.

Author: Susan Scrupski

Longtime fan of technology to improve humanity.