Cedars last hope for profits rests with Alchemy

It is every IT manager’s nightmare: their trusted supplier descends from being a high-flying enterprise software and services vendor to a company on the brink of insolvency within six months. That is what has happened at Cedar Group of the UK. But alarmed customers were thrown a lifeline in January 2002 with an eleventh-hour rescue package from UK private equity group Alchemy Partners.


Company name: Cedar Group

HQ: Cobham, UK

Main activity: Consulting and financial software

Last full year revenues: €118.7m

Last full year loss: €38.9m

Key issue: Assuming the Alchemy takeover goes through, Cedar's new management will be charged with lowering costs and avoiding a mass exodus of blue-chip clients.



At its March 2000 peak, Cedar was valued at a cool £964 million. But Alchemy is offering just £3.8 million, underlining how far Cedar has fallen. If the Alchemy bid is rejected by shareholders, the only alternative will be to place the company in administration. The transaction was awaiting the approval of shareholders as Information Age went to press.

The deal holds out the possibility that Cedar’s disastrous descent has bottomed out. To turn the company around, say analysts, Alchemy will have to restrain expenditure and properly integrate the 12 acquisitions Cedar has made since 1997 – issues that Cedar’s outgoing management seemingly never got to grips with. Alchemy’s management confirms that this is the investment company’s plan.

But there remains a suspicion in some quarters that Alchemy will choose instead to adopt the kind of strategy that made Computer Associates (CA) famous – and feared – by ruthlessly slashing development of acquired technologies, initiating mass job cuts, and hiking prices to ‘milk’ the legacy installed base of customers.

“That kind of thing can happen of course,” says outgoing CEO, Mike Harrison, a former UK managing director of Oracle. “But I am comfortable with [Alchemy’s] assurances that it is not a slash-and-burn strategy.” Despite Cedar’s problems, he claims, all its customers have stayed loyal (although some have deferred decisions on new projects).

Cedar brought itself to the brink of collapse, say analysts, after an ill-fated attempt to build a US business, over-paying for many of its cash acquisitions and failing to integrate those companies into the parent group. There is also a belief that Cedar over-estimated the size of its business, which may help to explain why the company’s collapse was so sudden.

The company’s order book at the end of March 2001, for example, showed licence sales of £46.4 million – and yet the company recognised licence revenues of just one-tenth that amount in the next six months. That not only suggests some orders may have been cancelled or delayed, but also raises questions about the way the company qualified its bookings. Furthermore, it suggests that the apparently healthy state of the order book at the end of December 2001 – standing at more than £30 million – should be treated with some caution.

The mainstay of Cedar’s business is its Enterprise Solutions Group (ESG) subsidiary, a US-based implementer of mostly Oracle and PeopleSoft enterprise resource planning (ERP) applications that it bought from Renaissance Group in 2000 for $72 million in cash. ESG has about 900 customers, including General Motors, Fosters and PepsiCo. After ESG, Cedar’s next most significant divison is financial software. Cedar has about 400 users of its financial software including BP, Daimler-Benz, Shell and Sony. It is an impressive customer list, which Alchemy says underlines Cedar’s considerable potential.

At the moment, the message for customers from Alchemy is reassuring. Alchemy partner Martin Bolland says that the plan is to complete the restructuring programme originally drawn up by Harrison, but halted as the company began to run out of cash in autumn 2001.

That will involve the company focusing on its three core businesses – enterprise solutions, financial software and knowledge management software. The SBA call-centre business and Streambeam broadband satellite venture will be sold.

But some radical cost-cutting is inevitable, regardless of who takes over. “Revenues of £50 million [in the first half of fiscal 2002] shows they were doing something right, but you cannot have £50 million revenues and £80 million costs. That sort of calculation is nonsense,” says Bolland.

Cedar is already cutting 320 jobs out of a total of 1,300 and if the deal is approved, those job losses will include a swathe of Cedar’s senior management. There are also plans to close a number of sales offices in the US and the UK. Combined, that should help save about £11 million in the second half of fiscal 2002. Max Thowless-Reeves, an analyst with research house Equity Investigator, says that it is fairly rare for Alchemy to sack the management team en masse after acquiring a company, as they plan to do in the case of Cedar. “That says an awful lot” about what Alchemy thinks of them, he says.

Ovum analyst Richard Holway concurs. To support his case he points to the turnarounds that Alchemy has engineered at the other three IT-sector companies in its portfolio – call-centre consultancy Datapoint, printing and packaging software vendor Radius and billing and credit management specialist Sanderson. “Alchemy will restore some sanity to Cedar,” he says.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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