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Morse in the mood for acquisitions

Microscope contributor

Such is the turnaround at Morse over the last eighteen months that the integrator is now positioning itself as an acquirer rather than an acquisition target.

Since embarking on a cost reduction drive in the summer of 2008, Morse has sold off its Investment Management Consultancy division and restructured the Business Application Services (BAS) unit.

The effects of those cost cuts were evident in today's interims for the first half year to 31 December 2009; sales were flat on last year at £108m but operating profit was £3.6m compared to £1m a year ago, while net cash was £13.6m, up from £3.8m.

Morse chief executive Mike Phillips said the service margins in its Infrastructure Services and Technology (I,S&T) division in the UK, Spain and Ireland were up 15% and it was looking for ways to further boost profitability.

"[We have] started to look at what we can add to that business either organically or through acquisitions which will augment the services you are offering to existing customers and hopefully future customers," he told MicroScope.

He would not be more specific about the type of services organisation it was interested in but noted that despite the current economic gloom, valuations of businesses with a high degree of contracted revenues and a relatively healthy pipeline were not cheap.

"We recognise from our position today that anything we do is quite difficult because Class 1 circulars and shareholder approval are quite expense processes but we are looking at things that 12 months ago we wouldn't have considered."

At the tail end of 2008, which was a loss making year for the integrator, its share price had sunk to an all time low of 7 pence, it was re-negotiating banking covenants and was a business in transtion.  

The opportunists in the market spied a wounded animal and last summer Morse was approached by an interested party with a 25 pence per share offer. The board felt this undervalued the company nevertheless Morse has remained the subject of takeover speculation in the City ever since.

Phillips currently estimates the firm to be worth around £70m based on its turnover, EBIT margin, and cash balance, which given the share volumes would equate to 65-70 pence per unit.

Back to the results, the I,S&T division grew sales by £7m in the first half of fiscal 2010 - as BAS revenues dropped by the same amount. The BAS unit was split into three divisions last September; portal and collaboration, business change/ transformation and SAP.

The unit had been under the control of Mike Emmet but after the restructure he ran only the SAP Diagonal element and left the business in November for personal reasons.

Phillips said it had dealt with historic issues with SAP and was building vertical solutions across BAS: "Those businesses should be capable of doing better than they are today," he said.

In terms of the UK economy, projects were still being delayed, Spain was facing a tough time with 20% unemployment while in Ireland large scale transactions were taking place for the first time in two years at relatively higher margins.

Morse may have turned a corner following the toughest period in its history but the economies in which it operates have some way to go yet before they recover. 

However, before the integrator climbs back on the acquisition, the management, and in particular chairman Kevin Loosemore will be keen to steer clear of past buy and build mistakes that contributed to the difficulties from which it has just emerged.

 


 

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