Datacraft founder studies US$240m takeover bid from Dimension Data
IF you were offered US$240 million for the company you had started in a garage 23 years ago and built up into one of the top firms in its field, would you sell and retire? That is the dilemma facing George Kepper, the 60-something Australian chairman and founder of regional networking giant Datacraft.
Nine days ago, South African-based Dimension Data, which like Datacraft builds and operates big voice and data networks for corporations and telecommunication service providers, offered to buy Mr Kepper's share of his company, which includes a 55 per cent stake in Datacraft Asia, one of the region's leading network integration firms.
In the $4 billion Asian market for network integration, Datacraft Asia specialises in building digital networks for telecommunication companies. Witness Datacraft Asia's winning $5 million bid for a contract with the Chengdu telecommunication company to build a high-speed digital data network for the Sichuan provincial city.
Last month, Datacraft Asia announced its best financial year results, with profit growth of more than 50 per cent. Barely a week later, it found itself part of a takeover bid in which the suitor was offering little more than half the company's stock price.
Dimension Data technically offered only $1.89 per share for Datacraft Asia, a tremendous discount from the $3.60 per share the stock was trading at.
Especially insulting to shareholders was that Datacraft Asia was the second-fastest growing stock on the Singapore stock exchange last year. Dimension Data did soften the blow by admitting its bid did 'not represent the value of Datacraft's shares'.
Analysts last week said Datacraft Asia stock might plummet as speculators rushed to profit from the difference between the bid and the trading price.
Other firms, such as ING Barings, said the $1.89 price was 'only a technicality . . . and does not reflect the fundamental value of the Singapore entity which is based on continued expectations of strong earnings growth in Asia'.
Before the bid, Datacraft Asia predicted revenue and profits would grow about 40 per cent this financial year to next June. Datacraft Asia makes its money by setting up networks, selling customers the hardware and providing service and support.
With profit margins on selling hardware disappearing - Datacraft Asia has increased its revenue through services and support to 19 per cent. Profit margins for services averaged 40 per cent to 50 per cent, a company spokesman said.
That has helped Datacraft Asia compete with Asia's top networking integrator IBM Global Services, other rivals such as Anixter International, ITS, and many smaller firms, while continually increasing profits an average of 50 per cent per year for the past six years.
In the past year, Datacraft Asia, which operates subsidiaries and joint ventures in Taiwan, Indonesia, and other Asian countries, registered a profit of $10.3 million on a revenue of $143.3 million, up 65 per cent on the previous year.
'The disappearing [telecommunications monopoly] gives us lots of opportunities to service new licences,' said Des Althorp, Datacraft Asia chief executive.
Most analysts agree that despite a possible short dip in the stock price, the buyout will be positive for Datacraft Asia because it has been trying for more than a year to have its parent's stake reduced in order to sell shares to the public and raise money.
One source said Datacraft was interested in raising up to $60 million this year to expand and keep pace with the expected 19 per cent average yearly growth in the Asian network integration market, according to Datacraft.
In order to gain staff and market share quickly, Datacraft plans to buy smaller integrator firms with revenues of between $10 million and $30 million a year.
Dimension Data is reportedly committed to reducing its 55 per cent stake in Datacraft Asia by 5 per cent to 10 per cent if the deal goes through.
The other effect might be to make Datacraft more accountable to shareholders. Integration projects usually took two to four quarters to finish, a Datacraft spokesman said. Datacraft would have to spread its costs to avoid surprising shareholders at any given quarter.
Dimension has said it did not plan to change any of the management of Datacraft Asia. The sale's major effect would be in Australia, where Dimension, through subsidiary Com-Tech, is one of the country's largest network integrators.
It would also affect Mr Kepper - a former engineer with Fairchild Semiconductor, the seminal Silicon Valley firm whose former employees later founded Intel, among others. If he sells Datacraft, he may find time again to tinker in his garage.