Pan-Baltic IT companies: the pain and joy of building an international IT group InfoBalt Investor

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Pan-Baltic IT companies the pain and joy of
building an international IT groupInfoBalt
Investors League ConferenceVilnius, Oct 22,
2002

• Allan Martinson
• CEO
• MicroLink

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MicroLink summary

• The largest Baltic IT group
• 60 m EUR in annual sales, 630 employees
• 5 divisions, 3 countries
• Business interests in
• System integration, software development,
  enterprise applications, training (ML Systems)
• Outsourced central systems and corporate data
  communications (ML Data)
• PC assembly and service (ML Computers and ServIT)
• New media (Delfi)
• Microwave radiolinks (SAF Tehnika)

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MicroLinks expansion story

• 1991 Foundation of MicroLink
• 1998 Sale of ML to CHS, creation of new ML
• 1998 Merger with Astrodata
• 1999 Acquisition of Parks, LvNet, Taide, SK,
  I-Net, VAR
• 1999 Launch of Delfi portal
• 2000 Merger with Fortech, ICS
• 1999-2002 Sale of ML Elektroonika, Linki, Kungla
  Dialoog, Columbus IT Partner, Taig, CHS Service,
  ADML, e-commerce ventures, e-consultancy, closure
  of retail outlets
• 2000-2002 restructuring
• gt20 m EUR invested in 4 years
• 4 private equity placements, multiple bond issues

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MicroLink in figures 1998-2002
Year FY97/98 FY99/00 FY 01/02
Sales 12 m EUR 46 m EUR 60 m EUR
Gross profit 2.4 m EUR 11 m EUR 20 m EUR
EBITDA 0.5 m EUR -0.5 m EUR 4.1 m EUR
Net profit 0.1 m EUR -2.8 m EUR 0.2 m EUR
No of employees 400 750 630
Active subsidiaries 9 28 16
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Changes in business and culture

• Software, services and RD (radiolinks) from 8
  in FY98 to 40 in FY02
• Sales by geography
• FY98 100 Estonia
• FY02 48 Estonia, 45 Latvia, 7 Lithuania
• Employees by country
• FY98 99 Estonia
• FY02 40 Estonia, 50 Latvia, 10 Lithuania
• Share of employees who are with ML from 1998 6
• Original founders stake down from 100 to 15
• But basic DNA is still the same

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MicroLinks slogans and strategies 1998-2002

• 1998/99 Within 3 years to establish itself in
  all 3 Baltic countries as leader in most IT
  markets (understood as PC retailing datacom).
  To invest 10 m EUR in 1-2 years
• 1999/00 Quick and dirty. Just do it. Doing right
  things is more important than doing things right.
• 2000/01 Streamline and simplify the group to
  become able to manage so many businesses in so
  many companies in so many markets
• 2001/02 Sales, sales, sales cost control
• 2002/03 We are strong, established, profitable
  professional services and solutions company for
  large and medium accounts

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Why did MicroLink expand?

• Rational explanation
• IT companies have high and growing cost base
• Personnel costs form 2/3 of the cost base and are
  growing
• Revenue base on small markets is volatile
• High uncertainty does not support dangerously
  growing cost base and investments into future
• Necessity to lower risks by getting access to
  wider markets with less volatility
• Have lunch or be lunch there is no escape in the
  long run
• Cultural explanation
• Aggressiveness, internationalism,
  enterpreneurship and curiousity are parts of
  MicroLinks DNA

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Was it worth it?

• The fundamental question did expansion add value
  for MicroLink and its clients?
• The answer is definite YES
• However, the first sources of added value were
  not where we initially expected them to be
• We expected the main benefits to be in higher
  efficiency and cross-border transfer of
  professional IT competences
• Instead, we benefitted from transfer of values,
  managerial competences and innovation

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Role of corporate values is often underestimated

• Initially, we thought we can buy skills and teach
  them values
• Now we know we can buy values and teach them
  skills
• All acquisitions which turned problematic were
  with companies which carried different value sets
• All acquisitions which shared similar values were
  able to learn and turn the businesses around and
  around
• In international expansion, you cannot buy market
  shares or businesses. You must buy right people
  they will do the rest.
• But before you find people similar to you you
  must very well know who you actually are
• Mergers brought MicroLink (one of) the best
  management teams in Baltic IT industry

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But consolidation also brings tangible benefits

• Lower costs through consolidation (cheaper
  financing, leasing, office space etc)
• Pan-Baltic vendor relationship (Sun, HP, Dell,
  SAP etc)
• Cross-border projects (some 20 Baltic projects
  fulfilled after mergers Tallinn, Riga stock
  exchanges, Est/Lat finance ministries etc)
• Possibility to serve pan-Baltic service clients
  (Coca-Cola, Statoil, Kesko etc)
• Stronger managerial leverage (good managers get
  wider responsibilities)
• Better visibility for investors and creditors
• ML only starts to reap merger benefits

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Do-nots of the expansion

• Never expand internationally
• If internationalism is not part of your DNA
• If your home is in disorder
• Unless you have excess managerial power
• Unless you are able to agree on simple rules and
  trust your new colleagues
• Unless you are sure you have enough money to
  survive through crisis
• It is always harder, costlier, slower than you
  ever think

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Why consolidation will continue

• Personnel costs (incl salaries, taxes, training,
  HRM) grow faster than local IT markets
• Average labor cost in Baltic IT companies 1200
  EUR/employee/month, added value 2500 EUR/m
• In CEE LC 2000 EUR, added value 3500 EUR
• In Scandinavia LC 5000 EUR, added value 9000 EUR
• Competition increases with pan-Baltic integration
  and EU accession
• Required competences become more deep and diverse
• Obvious answer Further consolidation and
  specialization of Baltic IT industry

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Thank You! Aciu! Paldies! Aitäh!