Daring Move Puts Mits Ahead
The Age
Thursday April 23, 1998
The first of the management buyouts within Victoria's state-owned utilities has made it on to the board of the Australian Stock Exchange, propelling two former public servants into the ranks of public-company board directors.
The information technology division of Melbourne Water was bought by six of its executives in 1989 and renamed Managed Information Technology Solutions, or MITS, with the venture capital firm Mezzanine Investment Trust contributing 15 per cent of the undisclosed cost.
Last month MITS merged with the listed technology firm TechComm Group to form Utility Services Corporation in a cash and share deal valued at $11 million to the original MITS shareholders, and giving them a 25 per cent stake in the new company.
The former manager of Melbourne Water's information technology division, and now the managing director of MITS and a founding board member of USC, Mr Geoff Cosgriff, said the plunge into business was a huge risk for those involved, although details of the original deal are subject to a confidentiality agreement.
"It (the investments required) was more than our houses were worth," he said. "Most of the original partners were salary earners and their personal assets were at risk."
Mr Cosgriff said the decision to form MITS was made at a time when the government and corporate sectors were downsizing and contracting out much of their internal operations.
"We had the energy and enthusiasm to say 'Do you think we can make it happen, and make it happen successfully?'."
The new company's first contract was with Melbourne Water, but it has since taken advantage of the privatisation of Australian utilities and the development of energy infrastructures in Asia to offer specialised computer-based services to the sector.
Although MITS had just one customer in its first year, by the second year 10 per cent of its revenue came from new customers and before the merger it had revenue of about $40 million.
The merged company is expected to produce full-year revenue of $65 million. USC's shares closed at 20 cents yesterday, giving it a market capitalisation of about $8 million.
Despite this success, Mr Cosgriff said the company had not always been sure it would prosper.
"The first couple of years were particularly tough because there was a contract with Melbourne Water which required us to find a lot of cost savings in Melbourne Water by introducing quality systems and processes," he said.
MITS recruited market researchers and financial analysts to help it determine in which markets it could be competitive.
"We looked at the products and services needed in the future with the changes going on in utilities with privatisation, which was just starting, and the old systems used by governments didn't make sense to the new privately owned operators," he said.
At the same time, Asian countries began investing in utility infrastructure, and by 1992 MITS had secured contracts in China, the Philippines and Malaysia.
But the downside to the Asian expansion was slower cashflows, as some of the multi-million-dollar contracts only required payment on the final commissioning and handover of the systems.
"So we were stretched in those early years in terms of what rate we could fund development and the introduction of new products into the company," Mr Cosgriff said.
"Most of it came down to the model we adopted, which was that whatever it takes we'll deliver a solution that works for the customer, and that gave us a basis for building a relationship where they would try to make early payments or we would restructure our deliverables."
The Victorian Government's move to privatise the local electricity business, which took off in earnest in 1994, also presented MITS with projects that Mr Cosgriff said "gave them a good buffer" against the Asian situation.
Apart from expanding geographically, MITS also grew its expertise.
About three years after the buyout, it acquired the Sydney-based company Megadata, which had a strong presence in the electricity sector.
"We saw it as complementary to the water expertise we had, and since then we have added products and skills in the gas, rail and telecommunications sectors," he said.
"It's given us a breadth so that our definition of utility has expanded to an organisation that manages large infrastructure or assets."
Mr Cosgriff said MITS had been approached by a number of multinational companies keen to acquire the business, but it wanted to remain Australian-owned while still being able to ensure growth.
"Emotionally it would have seemed a bit of a let-down to see what we have built up be sold to a multinational as a way for them to leverage their products into this marketplace," he said.
It decided on the merger with TechComm as the company had complementary services in related fields such as telecommunications, banking and retail. "The focus of the business now is really about providing a suite of services to the utility sector," he said.
"The boundaries between various utilities, retailers and banking are blurring . . . Over the next five years we'll see the emergence of the super-utilities so we aim to set up USC to provide consulting, operational tools and training to help them put the infrastructure in place."
But Mr Cosgriff said the merger also presented the opportunity for the original partners to assess their futures.
Mr Cosgriff and another partner became founding board members of the new company; two partners kept their shareholdings but left the company, and another two sold their shareholdings and left the company.
USC was now looking for acquisitions to further complement its services, such as in maintenance solutions and system design, he said.
MITS also has alliances to provide its technology to companies in the US and the UK, and has clients throughout Asia and in Egypt, Zimbabwe and Latin America. Mr Cosgriff said it was seeking more expansion.
"We see a lot of activity happening in China and Hong Kong despite the recent slowdown . . . That's going to provide quite a bit of growth in coming years," he said.
Mr Cosgriff said that in hindsight some of the expectations of the original MITS executives were naive, with only about 20 per cent of the expected road to success proving correct.
"And there's a lot of work ahead of us to realise the next vision, which is to become the dominant player in providing services to utilities in this region."
Does the company still work for Melbourne Water? "Yes, but not much these days. They are a relatively small client - a small but important client," Mr Cosgriff said.
© 1998 The Age