Managing director of Newport Capital, Lou Richard, has a wealth of financial advisory experience to distributors and resellers alike. He sat down with ARN to discuss some of the trends he sees in the market, and expectations for 2011.
Can you give me a background on yourself and the company? Lou Richard (LR): I began my career working with people with learning difficulties. I was trained as a psychologist, which as I say was the perfect forerunner for entering the technology industry – that’s a joke.
I was headhunted by IBM, then joined Australia’s largest and greatest enterprise in the technology space, Computer Resources. I had about 400 staff and we did everything you could do in technology at that time. We had datacentres and wrote software and maintained computers and sold hardware, and sold used IBM equipment. I tried to buy that in 1979, failed in the acquisition, so left and started a replica, it wasn’t quite as big and bright. It was a company called Australian Technology and Computers which I developed through to about 1985.
We had a datacentre in Sydney and Melbourne providing services to finance and insurance companies, writing software, selling hardware and so on.
I sold that to a UK group in 1985 and intended to escape and sit on a beach or write the great Australian novel, but I finished up becoming the chairman of the UK group I sold to. I then took on a consulting engagement with Computer Power Group. That lasted about two years, and I bought various companies for Computer Power, because my background had been littered with mergers and acquisitions (M & A). I became the regional marketing director for ICL, worked there for a number of years, and then in 1989 I started this business.
I’d done all sorts of things and I thought it was desirable to have an advisory and M & A shop, staffed by people who are out of the industry masquerading as investment bankers vs. investment bankers masquerading as technology people, and over the years that view has proven correct. The thing that differentiates us, we are expert people; we know what’s going on in technology. So when we go and interview a company with a view to engage them or trying to buy them, we’re immediately aware of what the issues are for the company.
The sectors that we now span are IT, telecommunications, new media, digital media and all of that ecosystem, and to a lesser extent green technology.
We do buy side engagements, we become the buyer’s M & A department, we sell companies or parts of companies in the range of $5 million-$50 million, the big brands tend to come in. We do capital raising and placements for larger private companies and small to mid cap ASX companies, and we do IPOs.
What are some of the quirks in the IT industry when it comes to M & A that your value proposition as IT people is beneficial to customers?
LR: The key issue is that we understand the business, so when we come to write documents if we’re selling a business, we can write the documents pretty easily and quickly, and present the company in the best fashion based on what we know buyers are interested in. If we’re representing a buyer we can say the appropriate things and provide the appropriate documentation to the companies that we’re trying to acquire, related to what the buyer is all about.
We tend to know what’s happening in the marketplace. It’s important to understand the valuation drivers. We can look at the company and its revenue segmentation on the basis of what those revenue strands are we can come up with a pretty accurate idea to what the likely value is, as opposed to what we have seen with large accounting firms where they provide comparables to establish valuations.
Where is the interest in M & A space at the moment for IT companies?
LR: There is comparatively little buyer interest in high volume product distribution, because there aren’t many players in that sector with deep pockets.
To a degree for that reason that’s why Dicker Data became listed. At some point in the dim and distant future, Fiona Brown and David Dicker, who between them own 96 per cent of the company, will want liquidity for their stock, and if they’re listed, once their voluntary escrows are released (June 30, 2011), after those escrows are removed, should they wish to sell down some equity they will be able to do that. And it puts them in a position of some prominence, as was itX in a position of some prominence as a result of being ASX-listed.
What about with the resellers?
LR: You will have noticed the prices of the ASX-listed IT services and integration companies has improved – companies like SMS and DWS. As a result of their pricing improving and their multiples improving and their businesses improving there is more appetite from those companies to start to aggregate by buying – we know DWS is actively seeking to buy things, and we know SMS is seeking to buy things.
Lower down the market, there’s not much appetite because there are few buyers. There is always active interest in the system integration businesses, there has been for years, and the prices for systems integration businesses is on the rise, and the interest in activity is going up.
There have been a couple of cases of ASX-listed companies that have been on acquisition paths reporting poor financial results – why do you think this might be?
LR: When you look into those companies – I haven’t necessarily looked closely at these companies – but for example UXC and its business services group, which is its IT services activities, is a sophisticated, solid, very good business with multiple brands where they have done very little back office integration.
They do have the difficulty of having agreed to earnouts, so they get perhaps half their money up front, and the more money down the back on years 1, 2 and perhaps even 3 on the basis of their earnings performance. That’s all good except when you come to the end of the earnout period because you’ve got to pay a lot of money, and these are fragile assets. The main assets are the people who start and manage the businesses, so if you pay them a lot of money at the end of their earnout period when the wake up in the morning with X amount of dollars in the bank, they see the world differently, their passion to drive the business forward reduces somewhat.
The real problem with UXC had nothing to do with the business services group – that’s still a solid growing business, apart from the earnout issue. The thing that really got UXC intro trouble was the field services group, and in particular sticking pink batts into people’s buildings.
It’s different in each case. Some times people can move too aggressively or just assume the integration is going to take place automatically, so part of our role is to advise people and tell them to look out for those sorts of things – it’s not just about the transaction it’s making sure the transaction is successfully done.
How do you see the market in 2011?
LR: I’m not optimistic about the balance of 2011. I think there will be some hard yards. I think interest rates will increase; I think bank lending to SMBs is going to continue to be pretty thin(?). The banks withdrew funding from the SME market. It’s been coming back to a degree, but I think it’s going to be tough. I think the NSW economy if there’s a change of Government, I think they’re going to fire thousands of people, and that should happen. The NSW Government has become bloated. I think the carbon tax if it is introduced is going to impact a whole variety of companies very negatively. The two-speed economy is going to continue with one of the speeds going upwards and onwards, and I think the industrial sector and SMBs are going to do it tough.