Monday, 28 January 2008

Warning from Maxima - Beware the consolidators

I note that Maxima has issued a profits warning; sending their share price down 30% to 165p (10.00am). The reason given was that “several major work packages with a large client were terminated prematurely due to a vendor consolidation exercise. This resulted in the work transferring to a tier 1 Global IT Services player...Certain business… in some other areas of the business, is experiencing client delays, not helped by broader current market uncertainties”.

The reason for the profits warning contains a certain irony as Maxima is as good an example as you will ever find of ‘vendor consolidation’. They now seem to be suffering from the current ‘flight to quality” whereby customers favour the larger “Tier 1” suppliers over their smaller competitors when a choice has to be made.

The latest incarnation of Maxima came into being in 2004 as the company name used for a merged Azur and Maxima. Maxima was an EPR supplier in the 1990s formed from an MBO at Minerva which then acquired Systems Team. Azur had been created out of Weir Systems and had bought Maxima in 2001 before acquiring IBS in 2004. By 2004, Maxima had such old established UK IT luminaries as Roger Graham and Mike Brooke on their board. Kevin Harrison (ex of Vega) was its CEO and Geoff Bicknall (ex of Northgate) its CFO.

In Nov 2004 Maxima IPOed at 110p and then set off on a buying spree. I think I’ve counted 10 acquisitions in the last 3 years. The most recent being Elcletic only last month/Dec 07. So today’s Maxima with annual revenues estimated around the £50m mark is actually the amalgam of over 20 different companies.

My views on consolidators is well known. They rarely, if ever, work. Investors value organic growth much more highly than inorganic growth – even if that inorganic growth boosts earnings by way of cost cuts. The best use of acquisitions, in my view, is when a company already has a good core proposition and uses acquisitions strategically. For example to expand overseas (Sage is a great example of this), to buy in the technology it needs (Microsoft is a great example of this) or to move into allied business areas (Cedar/COA is a good example with their move to add HR to their FMS core offerings).

The problem is that I keep getting sidetracked into thinking that perhaps I’ll find someone with the magic formula of making consolidation work for the long term benefit of shareholders. I have a lot of time for Harrison. He’s a thoroughly nice guy who tells a very convincing story and has executed well. Indeed Harrison himself has often told me personally that he intends to be the one who proves the Holway sceptic wrong. It’s a shame that he has now seen much of the considerable shareholder value he has created since the IPO knocked away as a consequence of the very vendor consolidation he has taken part in.

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