Friday, 2 January 2009

While we were out...

(By Anthony Miller) It’s been relatively quiet these past couple of weeks but there have been a few bits and pieces that caught our eye:

Indian winners:
Wipro, which snapped up Citgroup’s four-year-old Indian IT services captive, Citi Technology Services (CITOS) for $127m cash, gross of $26m net cash on the balance sheet. CITOS services most of Citi’s worldwide businesses outside of Latin America. Wipro takes on 1,650 CITOS employees and 600-700 contractors (but no assets) and becomes Citi’s exclusive provider of Technology Infrastructure Services (TIS, i.e. infrastructure management) and a preferred supplier of application development and management (AD&M) services. Wipro expects to generate revenues north of $500m over the six-year deal period. Management have reason to be very happy with the deal, given CITOS’ current 38% EBITDA margins, way above Wipro’s traditional IT services business. This is Citi’s second major outsourcing deal in recent weeks, following the sell-off of its Indian BPO captive, CGSL, to TCS in October for some $500m in return for a $2.5bn BPO contract (see here). Surely we will see many more deals like these as troubled banks seek to raise cash and cut costs – and who better to go to than the leading Indian SIs on both points.

Indian losers:
Satyam, which is in all sorts of trouble following founding chairman B. Ramalinga Raju’s outrageous attempt to bulldoze Satyam’s investors into buying his sons’ infrastructure and property companies (see here). Just a week later, the FT (among others) revealed that Satyam had been barred from doing business with the World Bank for eight years for providing “improper benefits to bank staff” (see here), allegations which Satyam management vehemently denies. To add insult to injury, the London-based World Council for Corporate Governance is reportedly considering withdrawing Satyam's 'Golden Peacock' award, which the Council describes as “the holy grail of corporate governance". Meanwhile, some of Satyam's non-executive scapegoats, sorry, directors, have resigned, though Mr. Raju remains doggedly at the helm. Of course, the press is rampant with stories that Satyam is yet again ‘in play’ with all the usual - and a few unusual - suspects in the frame, including IBM, Accenture, Wipro, HCL, Tech Mahindra and even the much smaller MindTree. This litany of disasters is a real blow for Satyam, a company which I have always viewed as one of the leaders in enterprise application services, with highly professional and ethical operational management here in the UK, as well as in Europe and India. The longer Mr. Raju and his immediate cohorts remain in executive control, the harder it gets for Satyam to regain its deserved credibility. By the way, the comments we received on my original article make interesting reading. Clearly there are some out there far more forgiving of Mr. Raju than I!

Unisys restructures ... again
After barely two months in the job, Unisys’ new chairman and CEO, Ed Coleman (previously Gateway’s CEO), announced plans to knock $225m a year off the company’s running costs, including sacking staff, halting pension co-payments and freezing salaries. We hear so little about Unisys’ UK operations nowadays. A couple of years ago there were still in the UK software and IT services Top 20 but it’s hard to see them retaining this elite position when we publish our rankings in April. We are sure they are out there somewhere, but no one at Unisys UK seems to want to talk to us.

Invu warns and loses its head
Tiny UK document management software firm, Invu, warned on revenues, profits and cash collection just before Xmas, also announcing that CEO David Morgan is to step aside. There’s lots more undertone in the warning (see here) which we won’t go into now (e.g. revenue recognition principles) but have seen many times before. It’s a real blow for Invu’s chairman, the very amiable Daniel Goldman (son of Sage’s co-founder, the late David Goldman), whom we have known over recent years.

Gladstone cuts off nose?
In what I suspect will turn out to be somewhat of a Pyrrhic victory for investors, another ‘little British battler’, education, health and leisure software player Gladstone, has successfully fended off unwanted advances from Canadian firm Constellation. In the current environment, management may well rue shunning the 25p a share offer. Gladstone’s shares were trading around 18p when Constellation made its overtures official, though they never exceeded the offer price as is often the case if investors expect another bidding round or a counteroffer. Gladstone’s shares settled back to just under 23p in the run-up to the end of the year as it became clear that Constellation were unlikely to win over investors. Now let’s see if Gladstone’s management can make good on its rather unspecific proposals to increase shareholder value.

Morse beefs up board
Morse has appointed IT services veteran Richard Atkins as non-executive director. We have known Atkins for many years, first as finance director at Data Sciences and then at IBM Global Services, which acquired Data Sciences in 1996. We firmly believe that Data Sciences formed the basis for IBM’s modern-day service business, which until then had been flopping around for want of a credible business model. Atkins should be able to offer Morse executive chairman Kevin Loosemore sage advice as he seeks to restructure – and, we assume, divest – Morse’s multiple businesses.

More woes for TIG
After a disappointing set of FY results (see here), followed a couple of weeks later by management’s outright rejection of an indicative 15-20p per share bid (see here), TIG now finds itself the target of legal proceedings. Canadian customer Allstate Insurance is claiming C$75m relating to the design, development and implementation of customised software for a new policy management system. TIG says it will “vigorously” defend the claim. My views on TIG do not sit comfortably with management but, as ever, we call it as we see it. This latest upset only adds to my deep concern. TIG’s shares currently languish around 6p. As George O’Connor at Panmure succinctly put it in his note of 30th Dec., “...this is not so much a disappointing end to 2008 – but a disappointing start to 2009”.

1 comment:

Martin Fincham said...

This link offers another perspective on the Satyam situation: