Endgame looms at Getronics
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Like so many of the grand deals forged in the white heat of the 1990s technology boom, Getronics' acquisition of Wang has unravelled with startling rapidity and the stockholders who bought into the vision back then stand to lose virtually everything.
Amsterdam-based services supplier Getronics was always an unlikely rival to Accenture, Cap Gemini and EDS, but in May 1999 when it scooped up Wang Global for $1.8 billion, anything seemed possible.
Getronics had grown fast during the 1990s via a disparate series of services acquisitions, but its Wang Global buy was the most ambitious of all. Not only was Wang much bigger than Getronics, it also had to finance the purchase entirely with debt.
Wang had emerged from Chapter 11 bankruptcy protection in 1993 with a $3 billion a year business based largely around PC maintenance. Getronics strategy was to use the unfashionable, blue-collar maintenance business as a stepping stone to move up-market to more profitable services businesses, such as systems integration and consulting.
Almost from day one, that plan began to unravel. Consulting and systems integration were the first sectors to be hit by the IT spending downturn, barring Getronics' hopes of moving up the value chain, while intensified competition reduced the meagre profitability of Getronics' core business.
"When the IT markets started to deteriorate from spring 2000 it became clear that Getronics was not one of the quality players," says Tij Hollestelle, an equity analyst at Bank Oyens &van Eeghen, a Dutch investment bank. "In the Netherlands, Getronics' employees are seen as IT people wearing a blue boiler suit," says another analyst.
Suddenly, the bonds and bank loans raised to pay for the Wang acquisition began to look overwhelming. Getronics was paying 0.25% interest on some EU530 million of convertible bonds. But the company's management argued that refinancing would cost the company more and decided to sit tight. However, the strings attached to the bonds and bank loans soon tightened to choking point as the technology sector went into freefall.
First, the banks called in their loans when Getronics' earnings fell below a certain level. As a result, the company's share price dropped precipitously, preventing it from raising money in the equity markets to solve - or at least alleviate - its debt problems.
Second, a business unit sale designed to raise cash triggered clauses in the covenants of the convertible bonds. Although Getronics received $223 million from the September 2002 sale of its US-based Government Solutions unit to DigitalNet, "Bondholders could immediately demand full redemption of the bonds if a material part of the company was sold," says Hollestelle.
The full impact of that move is just about to be seen. The DigitalNet deal completed in March 2003 and, according to Hollestelle, not only does Getronics not have the cash to pay off the bondholders, it is barely profitable on an everyday operating level.
Furthermore, the company is now valued at just EU100 million - barely one-fifth of the amount it owes the bondholder - and on top of that, its pension fund is in deficit to the tune of some EU189 million, according to analysts at Credit Suisse First Boston.
The rescue plan hatched to keep the company out of the bankruptcy courts has also provoked shareholder fury. In the absence of the cash to pay the bondholders, Getronics has negotiated a debt-for-equity swap that will leave ordinary shareholders with just 4% of the company.
Amid this mounting chaos, Getronics' tarnished management, CEO Peter van Voorst and CFO Jan Docter finally left in February 2003. Their replacements are Axel Ruckert and Klaas Wagenaar, a management team with a reputation in the Netherlands as 'turnaround artists' at electronics giant Philips and software vendor Baan.
Neither are ruling out alternatives to the debt-for-equity swap, such as the sale of other parts of Getronics' business or deals with rivals to bring in new financing. But at this late hour, even they will have their work cut out salvaging any more for shareholders.
Fortunately, customers are unlikely to be affected. The most likely outcome is that the company's ownership will simply pass to the bondholders. If stockholders vote down that deal, the bondholders will simply call in the administrators.
Shorn of its debt payment obligations, there is nevertheless a profitable company underneath, even if it is a more mundane business than was originally planned in the heady days of 1999.
