Tuesday, 19 June 2007

Microgen and Trace

16th June 07
Microgen and Trace
I note in my absence (I've been off visiting my 2 year old Grandson in Oz) that Microgen (where I was an NED up until Oct 2006) is back to its old tricks. Having seen an MBO team (codenamed Tulip) top its May 25th offer of 155p by offering just a 1p more on 13th June, on 15th June Microgen increased its own offer to 180p; valuing Trace at £25.6m. Microgen has already bought 25.83% of Trace stock and has an irrevocable from Katie Pott's Herald Investment Management for a further 7.9%.The MBO team do not seem close to giving up ...yet. They issued a statement late Friday saying that, contrary to the earlier Microgen statement, they have no intention of lapsing or withdrawing their offer and intended to put it to shareholders.

Clearly, if Microgen does win Trace, the MBO team is likely to depart. We do not know how deep their support is with the remaining Trace employees - we would suspect it was quite strong.

What Microgen needs is organic growth. An acquisition-only strategy has never worked for any IT company (certainly it hasn't worked for Microgen or its long suffering shareholders) and, in my view, it never will work. I am sure that Microgen can reduce Trace costs and show short term profit improvement as a result. But that will not be enough. Indeed shareholders will continue to punish Microgen even if it improves profits (and even earnings) but fails to show organic revenue growth.

I would suspect it will find such organic growth even more difficult if it takes over a seriously depleted and demoralised Trace workforce.

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