Depressed value makes Dimension Data an attractive target for a takeover

Posted On Monday, 26 August 2002 10:01 Published by
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Information technology firms look set to consolidate and analysts agree that Dimension Data, a former kingpin on the JSE, is well-placed for a merger
By Stuart Graham

Information technology firms look set to consolidate and analysts agree that Dimension Data, a former kingpin on the JSE, is well-placed for a merger.

Didata has an attractive global footprint and, at around R4.40 a share, is seen to be operating at a significant discount compared to its peers in the UK.

Rory Spangenberg, an analyst at Appleton, says a recently announced merger between IBM Global Services and PWC Consulting could spark interest in the fragmented IT sector.

Craig Hackney, an analyst at Barnard Jacobs Mellet, says Didata's depressed value has made it a good target for a takeover. But he says that potential buyers might be dissuaded by the cost if there is a need to reduce staff.

Jeremy Ord, Didata's chief executive, says the current IT environment will inevitably lead to consolidation in the industry.

'Didata is not looking for a partnership, but if one came along that made sense, the company would be obliged to take the option to its shareholders.'

Didata's share price must be seen in the context of the IT industry and the Nasdaq, which are at an all-time low, Ord says. Most IT companies are more than 70% off their 2000 highs.

Didata traded at R70 a share two years ago, when it was the third-biggest company on the stock exchange after Anglo American and Richemont, and larger than De Beers and Billiton.

'Given these market conditions, Didata will continue to focus on operations, cash-flow and working capital management as well as invest in our own intellectual property, which is key to the future,' says Ord.

As part of its cost-cutting measures, Didata has reduced its staff by 9% since releasing interim results in May. Analysts say its overheads forecast of $420-million is on target.

Ord says the company hopes to make no more staff cuts, but adds that Didata is micromanaging costs across the group 'in order to appropriately weather the economic downturn'.

He dismisses suggestions of motivational problems with Didata's top managers, saying the company is on track to achieve sequential increases in US dollar revenues in the second half of the 2002 financial year.

Another issue that might scare off buyers are problems at Didata's 51%-held Singapore-listed subsidiary, Datacraft Asia.

On Thursday it was announced that Singapore's commercial affairs department was probing Datacraft on allegations of insider trading. Datacraft tumbled by 8% on the Singapore Stock Exchange after the news, until trade in the share was suspended.

'Given that trading conditions in Asia are also having an impact on Didata's gross margin, we considered it to be in the best interests of Didata's shareholders to provide an update on Didata as well,' says Ord.

Before news of the allegations broke last week, Datacraft reported it had traded profitably at the operational level in the 12 months to June 30, but warned it might post a small operating loss for the quarter.

Didata responded by saying the gross margins forecast for the group had dropped from 22.1% to 21% due to a slow quarter to September for Datacraft.

Didata also mentioned that its margins might be further affected by two strategic, low-margin transactions in New York, and a higher revenue contribution from Australian hardware distributor Express Data.

The problems at Datacraft are from alleged impropriety in some of its Chinese import and export activities, which saw it write off debts of $23-million, destroying the operating profit of $10-million it earned for the six months ending June 2002.

Detailed figures will be released later, because Datacraft has changed its year-end to September to match Didata's.

Spangenberg says Datacraft's projected operating loss is based on an uncertain outlook for the current quarter owing to challenging trading conditions and continued margin pressure.

Analysts have warned that unless Didata speeds up its swing towards services, its margins will continue to diminish.

Spangenberg says continued margin pressure suggests the transition to a service model is taking longer than expected.

Didata has been criticised for relying heavily on low-margin equipment sales, despite efforts to focus on higher margin services around the goods it sells.

Sunday Times

Publisher: Sunday Times
Source: Sunday Times

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