When Gresham Computing was controversially classifed as an internet stock by the London Stock Exchange at the beginning of April 1999, it was a significant milestone in the remarkable transformation of the UK headquartered software and services company.
Although the official internet rating has failed to boost Gresham’s stock price, as its executives had hoped, the classification means that Gresham no longer has to work so hard to convince the skeptics that it really has changed. For years, a mostly skeptical investment community, and a dwindling group of customers, viewed Gresham as a rudderless supplier of mainframe software utilities for Fujitsu/ICL mainframes – a class of machine that is being slowly killed off.
Then, in early 1997, the board fired the two top managers, Chris Swinbanks and Chris Howe-Davis and installed Trevor Read, a former agricultural engineer and autobank salesman at NCR, as CEO. Read reversed the previous policy of tight cost control, and initiated an expansion strategy. A public relations makeover, meanwhile, repositioned the company as an e-business specialist – a label which until recently was more marketing than substance. As soon as the share price allowed, the company accelerated its expansion with a series of acquisitions.
The effect of Read’s strategy has been dramatic. In October 1997, a few months after he joined, the market valued the ailing Gresham at just 8.35m pounds ($14m). On May 10, a few days after closing its first six months for 1999, the company was valued at 56m pounds ($93m). Annual revenues in 1997 jumped from 8.7m pounds ($14.5m) to 23.1m pounds ($38.5m).
The next milestone will come in June, when the company announces its interim (first six months) results. Revenues are expected to be more than double the 8.5m pounds recorded a year ago. For the full year to October, analysts are forecasting profits of around 4m pounds ($6.5m) on revenues up more than 30% on 1998, taking the company above the $50m sales mark.
The turnaround at the e-business services company is all the more remarkable given Gresham’s background, and Read’s adherence to a strategy which goes against much of the conventional wisdom in software and services. His starting point seemed inauspicious. In 1997, Gresham’s flagship products were a transaction processing monitor for ICL mainframes and a number of connectivity products, mostly linking ICL to Unix systems. In all, the company had 20 mainframe products, accounting for most of its revenue. There was also a recruitment and consultancy company, which Gresham still holds.
Even Gresham’s position as a London listed company seemed unjustified. It achieved this through a reverse takeover of struggling rival Telecomputing in 1994. This secured a listing on London’s small stock market, the unlisted securities market. Later, when the USM was abolished, Gresham moved up to main market.
The previous management believed that they could build a long term business around mainframe connectivity products, but a revenue fall in 1997 prompted Read’s appointment and a complete rethink. Now, the focus is on solutions, which mostly means building customized systems for customers. Read views products not as something delivered in a pack of CDs, but as blocks of code which help to fast-track these solutions. They prove that you have done it before. Although he has no plans to ditch any of the products in the portfolio, We’re unlikely now to come up with a product that has no customers.
These tools, however, are playing a key part in Gresham’s new found growth and in the type of business it is winning. Casablanca, for example, is a Java based middleware tool for linking so-called legacy applications to new front-end web servers. Gresham’s dramatic increase in revenues (and its internet classification) was largely down to a successful push for big system integration contracts in the e-business area using its middleware products.
Services [companies] need a differentiator, says analyst George O’Connor of investment managers Granville. He was initially skeptical that Gresham could escape its ICL background, but believes the financial figures now demonstrate that the product led services model is working. The whole issue (for customers) is getting an existing line of applications and putting them on the web. I am really impressed with Casablanca.
The biggest driver in Gresham’s resurgence, however, has been its so far successful series of acquisitions. In the last two years, in a series of cash plus shares deals, Gresham has bought: Circa Business Systems, a UK based financial systems integrator specializing in Tandem software, for 1.3m pounds; Newlog, a French storage software company, for 0.85m pounds; Open Microsystems, an Austin, Texas storage software company, for 1.2m pounds; OFS, a Canadian financial systems builder, for 0.7m pounds; Ozease, an Australian banking and insurance software and services company, for up to 0.8m pounds (performance related); ISS, an Australian financial systems integrator also specializing in Tandem software, for up to 0.5m pounds; US consultant Automatic Solutions for $2.7m, and, most recently, the SIM Group, a software testing tools and services company, for 10m pounds.
These acquisitions have also helped Gresham towards achieving a wider geographical base, with just under a third of its 1998 revenues coming from outside the UK. However, in spite of some recent success winning web project work, Gresham still has some way to go before Read can say it has achieved its stated goal of earning meaningful revenues from the US.
There is no sign that the acquisition spree is about to end. Gresham’s share price is as high as ever, and it recently raised more than 3m pounds in a rights issue. Read says these acquisitions – which he finds by word of mouth and without recourse to mergers and acquisitions specialists – have all contributed to the one message: Everything we do is moving towards e-commerce. For example, both software testing tools and the online back up tools are intended to enable Gresham to build more reliable online systems for e-commerce.
Investment analysts are not entirely convinced. Many think of Gresham as a typical services company, not a next generation Internet company – but with services companies regarded so highly in the UK, this does not really matter.
O’Connor of Granville credits Read with building a new company that has a new personality. But, he says, there is a view that he is has gone too much for acquisition and not enough on tying the companies together. I would like to see a cleaner organisational structure. Gresham’s contined ownership of a recruitment agency, for example, might be questioned, even though it is both profitable and growing.
