By Dr Steve Barnes, University Campus Suffolk
From a case study entitled “Smart421 - The start-up that never gave up” published by Cengage Learning
A new company was born in 1989 in the UK, called Salmon, and Julian Harris was one of the five directors appointed with a mission to be the Number 1 Pacbase consultancy in the UK. Pacbase is a COBOL code generator that is developed and maintained by IBM, and it runs on a mainframe computer. The applications that are produced by this structured programming language are big, and would typically be used for complex enterprise solutions like Council Tax, Utility Billing systems, and other public service applications.
Things started well, the client base started with a few large “blue chip” customers, the pipeline grew and work seemed secure. Julian admitted that he didn’t know the first thing about how to run a business, and didn’t really think about an exit strategy either. He was just enjoying the buzz of trying to create the best computer company in the world.
Just 3 months after Julian joined the company, they ran out of work, as customers stopped spending money and the country had to cope with the first of a number of technology recessions. This recession was deep and long lasting, and it is only by looking back that we can see how serious it was. A recession that is severe by recent historical standards lasts around two years (Schmitt & Baker, 2008), the 1989 recession lasted longer with unemployment reaching a peak in 1989, and not recovering until after 1992 (ibid). Prospects were bad, directors drifted off, and Julian took to contracting in the City of London, to make ends meet. It looked like the dream had come to a very quick end, and for the next few years the company struggled.
In 1993, work started to pick up for Salmon as the country recovered, and as income started to grow again. From 1993 until 1999, revenue was doubling every year and this was noticed by industry analysts. It was rated 31st fastest growing company in the UK by Sunday Times Fast-track and by the year 2000 it had posted revenues of £22million, with a staff compliment of 350. The boom times had come it seemed, for Salmon and many other technology and “dot-com” companies. Stock values raced ahead as speculators bought into the technology sector, and company values soared.
Then, on March 13th 2000 the NASDAQ saw its largest fall in stock prices that year, and once again Salmon, along with many other technology companies, would have to fight for its life as the recession started to develop. This time Salmon was much larger and so had further to fall, and business life was stressful and sometimes unpleasant. Julian and his equal share holder and joint CEO, had to make the decision whether to sell the company on the open market, demerge it, or to sell his share to the other directors.
Julian decided to restart, and in June 2000 started a new company, called Smart421: Smart solutions for the 21st Century. This time it was aimed at providing complex, multi-channel solutions to blue-chip clients. The company had to rebrand, reposition, and in many ways start again. It was a very creative time, and many new small companies were formed by the Smart421 group: Oakington, GiveUsTheScore (GUTS), SmartIntegrator, etc. On reflection this was a creative, hugely enjoyable, but costly exercise, and the company started to lose focus, customers and lots of money.
The combination of the dotBomb in the early 2000’s and loss of focus was painful. On one day Julian had to sack 50 people! The overdraft was growing, and at one point Julian had to secure their £1million overdraft against invoices for work carried out, but which was falling in value month by month. Pay cuts started to bite and staff became demoralised. Times were hard and getting harder. The company had missed its exit window because the falling value of the company and the tough financial environment just wouldn’t allow a company sale.
In 2003, Smart421 was again restructured, repositioned and started to try and recover. It was now selling high-end complex solutions with niche software toolsets like IBM WebSphere. Other changes were brought in as they closed their non-core business, and Julian began the process of building the company value to meet the exit strategy of selling it to the highest bidder. This time he wasn’t going to miss the exit window. In 2003 they worked out that to build real value for an exit, they needed to increase the forward order book, and the key decision that was made was to provide clients with more outsourced, managed services work, rather than just short term consultancy, which then allowed them to lock in customers to 3-year deals.
The exit process started in September 2005, and took 12 months of careful management and patience waiting for the right market timing and for income figures to recover. The process was clear: firstly, Julian set up a beauty parade of M&A consultancies who specialised in the IT sector. Working with these they built the Information Memorandum for the company i.e. their sales document.
Finally, an invitation to tender went out to 30 targets and after short listing a blind auction ran on a select few. Four weeks were taken to complete Due Diligence, before final selections took place. On 29th September 2006 Kingston Communications [now KCOM Group plc] acquired Smart421 for £24.24million.
Copyright © 2010 Cengage Learning. All rights reserved.
Reproduced with grateful permission of Cengage Learning.
Harvard referencing should read:
Barnes, S. (2010) ‘Smart421: the start-up that never gave up’ in Stokes, D., Wilson, N. and Mador, M. (eds) Entrepreneurship. Andover: Cengage. pp. 380-382.