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Strategy: Slash and Burn - BRW Article

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    Below is the Powerlan article in the current edition of BRW.

    Strategy: Slash and Burn

    By Brad Howarth

    The technology entrepreneur Theo Baker is re-inventing Powerlan, the information technology (IT) services company he established in 1992.

    THEO BAKER: 'We can't stand in the market the way we are'

    There is nothing wrong with that: technology companies routinely re-invent themselves. But Baker is gutting the business and may be at risk of destroying it.

    By June 30, Baker hopes to have sold Powerlan's core business in IT systems integration, ditched several subsidiaries, cut its workforce of 850 by 65%, and shed more than 60% of its revenue. The Powerlan name also is likely to be abandoned because Baker feels it is too closely linked with the company's old business model.

    Powerlan reported revenue of $342.1 million for 2000-01, and Baker expects to finish 2001-02 with revenue of only $220 million. The fall is the result of a decline in sales of IT systems in the past year, and the closure and sale of some subsidiaries. Selling the IT systems integration business and other divisions will slash Powerlan's revenue to about $70 million in 2002-03, albeit with a predicted strong profit.

    The planned changes to Powerlan mark a big - and risky - shift in its core business, from product installation and maintenance to product development and sales. Baker says Powerlan had to quit the IT systems integration market because it has little potential to add to Powerlan's profits, despite its contribution to revenue.

    'When we first started this business, you could make a 35% margin in hardware and a 65% margin in services,' he says. 'Today, we are getting 25% in services and only 5% in hardware. We have spoken to fund managers and the institutional community, and what they are interested in is the bottom-line EBIT (earnings before interest and tax) margin, sustainability of business, and quality of income.

    'When we listed in September 1999, we knew we could not remain in selling commodity products and providing commodity services,' Baker says. 'None of us anticipated that the market downturn would be so dramatic ... In the past 18 months, it has got to a point where we can't just stand in the market the way we are.'

    Powerlan made a profit of $18.6 million on revenue of $342.1 million for the year ended June 30, 2001. Since January 1 this year, Powerlan's share price has fallen from 46 cents to 20 cents (April 26) - and it has plunged 50.6% since Baker announced the takeover of Clarity International on February 12.

    Baker wants to turn Powerlan into a company focused on software development and sales in the telecommunications and finance sectors. To gain skills in telecommunications, it has begun an all-scrip bid for the listed software developer Clarity (Powerlan already owns 38% of Clarity, which it acquired in 1999, and Baker is its chairman.)

    Analysts are uncertain about the wisdom of Baker's radical plan. A senior equities analyst at Commonwealth Securities, Ross MacMillan, rates Powerlan as a hold. 'We would like to see evidence that this transformation is going to be successful, and that it is also going to be profitable.'

    An equities analyst at Deutsche Bank, David Leslie, rates Powerlan as a buy, partly because its share price is so low. He supports Baker's plan to sell divisions, but is worried about the purchase of Clarity, which relies on 10 big clients for its annual revenue. Clarity has signed only two new clients this financial year.

    Reduced capital spending by telecommunications companies has hurt Clarity. It lost $5.8 million on revenue of $14.5 million in the six months to December 31, 2001, compared with a $1.1 million profit in the previous corresponding period. Powerlan is offering one of its shares for every three Clarity shares, which values Clarity at $41 million. Baker hopes to complete the takeover by June 30.

    Powerlan is selling many of the 28 companies it bought in the two years after it listed. Baker says: 'We have set a mandate that by July 1 we want to be out of a lot of these businesses, and to be completely focused in those core areas. Our strategy now is to have a couple of pillars of world-class products that clearly give us a differential and also are within the top five globally.'

    Analysts are concerned that it is not a good time to be selling, and that Powerlan has not stated the price it expects to receive for its IT systems integration business. Baker is confident it will bring a 'reasonable' price. 'Yes, our revenue may increase but the margins will never come back. That's very clear. I don't think anyone is going to pay a significant amount in a year's time, or two years' time.'
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