A new study has highlighted the many benefits flowing from management buyouts. Mark Beyer reports on a little known Perth company that has been thriving since completing its MBO.
NEW ownership has contributed to a remarkable turnaround in the performance of South Perth-based information technology company Ripple Systems.
In the past six months the company has won new export contracts, tripled its order book and added more than 20 employees.
It is projecting further substantial growth and even looking towards a stock market float in three to four years time.
The bright outlook is a huge change from the lacklustre performance that dogged the company under its old owners.
Ripple has traded under several names over the past decade, including Mi Consulting Group, Motherwell Information Systems and Control Systems International, reflecting changed ownership arrangements.
Its current ownership structure, put in place last December, differs in at least two key respects from prior arrangements.
First, management has a direct 30 per cent shareholding in the company and second, it finally has a major shareholder in Singapore Technologies Electronics that is adding value.
Ripple Systems is one of about 50 Australian companies to change hands through a management buyout since 1986.
A survey by the Australian Venture Capital Association, using data from 42 companies, concluded that MBOs have a direct beneficial impact on company performance.
Ripple Systems managing director Paul Nicholson would certainly concur with the findings of the survey.
He said STE, a division of the giant Singapore Technologies Engineering conglomerate, was keen for management to acquire a direct stake when it commenced negotiations last year.
“They realised they couldn’t just buy the company and run it themselves,” Dr Nicholson said.
“We have a very specialised business. It was crucial to have the involvement of the senior management team and our technical people, who built up the expertise.”
Ripple’s specialist field is automated ‘command and control’ systems for road and rail networks.
Its software delivers integrated traffic management systems centralised in a single control room.
Its system is used in the Perth traffic centre, Melbourne’s CityLink freeway and Adelaide’s southern expressway and is being introduced in Singapore and Kuala Lumpur.
The second leg of its business is smart card applications for automated ticketing systems and wider applications.
Ripple has conducted extensive software development for ERG and is now part of a consortium that is bidding (against ERG and others) for the right to build Perth’s smart card-based public transport ticketing system.
Dr Nicholson said “five to six very large multinationals with recognisable names” were genuinely interested in buying the business when the financially-troubled Mi Services Group put it up for sale last year.
“The reason we were interesting to companies like that is that we were in the [transport] market they serviced,” he said.
“They wanted to provide complete turnkey solutions and the one bit they couldn’t do was the command and control systems.”
What had been planned as a straight trade sale turned into an MBO when STE became involved.
PricewaterhouseCoopers head of corporate finance and investment banking Angel Barrio, who managed the sale process, said this created an unusual situation, since management went from assisting the vendors to being potential buyers in a competitive sale process.
The eventual sale valued Ripple at $4.5 million, with STE (70 per cent) and nine senior managers (30 per cent) contributing $2 million of equity and STE providing $3.45 million of debt.
Dr Nicholson said the relationship with STE had contributed greatly to Ripple’s recent success.
It has helped Ripple win two big contracts, for the 35-station Circle Line railway project in Singapore and a 39-station railway project in Kaoshung, Taiwan’s second largest city.
“We finally have a parent that is adding value to our business,” he said.
“It’s a symbiotic relationship. Both parties are getting something very valuable out of each other.”
STE provides financial backing, marketing skills, domain knowledge and credibility in Asia – “we can open doors that were impossible to open before”.
For its part, Ripple provides specialist expertise in the crucial command control systems that integrate all of the sub-systems – “we are the tip on STE’s arrow”.
Dr Nicholson said the two contracts in Asia would help Ripple more than double turnover, from $6.5 million in 2002 to about $14 million in 2003.
He is projecting a pre-tax profit of $2.5 million this year and “substantial” growth in staffing (the company has 74 staff), sales and profit in future years. The bright outlook is helped by the prospect of increased spending on rail infrastructure in Asia over the next two decades.
Dr Nicholson said a float in three or four years would give all staff and other people an opportunity to invest in the company.
He anticipated STE would retain 20 to 30 per cent, so that it had less capital tied up in the business but was able to maintain the all-important strategic relationship.
