Is your IT department worth more than the business? On the face of
it this may seem a ridiculous question, but given the valuations
attached to IT companies compared to the more traditional
businesses they support, the answer may well surprise you.
The news this week that BGR, a restaurant business, is to float
its internal division which supplies it with EPOS and reservations
software should set minds thinking. Although it has not yet
released full details of its plans, BGR's internally-generated
software has attracted interest from similar businesses and
floating it will allow the division to make the most of these
opportunities. According to some estimates, the value of the
de-merged division could be as great as that of BGR itself.
BGR is not an isolated example of this phenomenon. ITNet was the
IT department of Cadbury Schweppes before a management and employee
buyout in 1995 and stockmarket flotation in 1998. Now, the market
capitalisation of Cadbury Schweppes is £7.8bn while ITNet's is
£600m. The buyout and flotation allowed ITNet to grow into a
sizeable IT services company, and diversify into other sectors and
businesses.
This makes a lot of sense. Internal IT departments that produce
bespoke systems or methodologies for their own business may well
find they are equally attractive to other companies within their
sector. If this is the case they may well find that, were they to
be sold off or floated, their valuation would eclipse the rest of
the business.
That's not really so difficult to imagine when companies in
traditional industries like banking and construction are operating
on multiples around 10 times earnings, while IT services companies
are attracting valuations up to 200 times earnings and software
businesses 150 times revenues. To think of it another way, in
recent takeover deals companies have been paying anything up to £1m
per fee-earning consultant. You can do the sums yourself.
These ratings should have IT directors thinking about the value
locked within their departments and whether there is an opportunity
they are missing. They should also consider their partnerships with
suppliers who often use individual implementations as a testing
ground for software systems they intend to offer to other companies
when complete.
While the user is aware of this and may receive benefits in
recognition of the fact, do these benefits properly reflect the
value the supplier receives in the future? Should you be looking
for a deal which reflects the development effort your team has put
into the system?
This could be similar to when a large football club buys a
player from a smaller club who often receive extra payments when
the player makes a pre-determined number of appearances.
However way you look at it, the current climate gives IT
directors the opportunity to stress their value to the
business.