FIND/SVP, the New York-based business research and consulting firm, announced it has purchased Teltech, the U.S.-based information management (IM) division of Sopheon, PLC. The acquisition brings together two of the leading custom research firms and provides much needed funding for Sopheon to focus on its software business.
The gross value of the transaction amounts to just over $5 million, including a $3 million cash payment and a contingent earn-out payment of up to a maximum of $400,000. According to the SEC filing, FIND also assumed approximately $2.1 million of net current liabilities and approximately $0.45 million of tangible fixed assets. As part of the structure of the transaction, FIND was to issue $50,000 of its stock to Sopheon on completion, and shortly thereafter Sopheon would issue $100,000 of Sopheon ordinary shares to FIND.
Sopheon sold Teltech for considerably less than the $34 million it paid for Teltech just 3 years earlier - a sign of the downturn in the U.S. economy. In August 2000, the U.K.-based Sopheon completed its acquisition of Teltech Resource Network Corp., a privately-owned provider of research and knowledge management solutions and services based in Minneapolis. Teltech was established in 1984 by Joseph Shuster, an engineer and entrepreneur. Teltech was based on his idea of creating a "knowledge commons," a single area where professionals could choose from a variety of resources to tap into technical expertise.
While Sopheon purchased Teltech with great hopes for increased revenues and a strong foothold in the U.S., the ensuing economic uncertainties and difficult business climate stressed its IM division, which responded by reorganizing and reducing its staff. Meanwhile, Sopheon experienced considerable growth in clients for its Accolade software solution for product development. In its 2002 Annual Report, Sopheon stated that it would focus in 2003 on converting Accolade into a "viable high-growth business," and noted that, "The planned divestiture of our U.S.-IM business will reduce complexity and sharpen that focus."
According to the companies, to maintain the differentiation that embedded information management support brings to its Accolade product development system, Sopheon will continue to provide and market the Teltech services through an exclusive outsourcing arrangement with FIND.
David Magnani of Sopheon is now senior vice president of the Teltech division of FIND/SVP, which remains in its Minneapolis location. Magnani joined Teltech in 1995 and has been responsible for the daily operations of the IM division since November 2002. Teltech currently has fewer than 50 employees, though it had about 150 when Sopheon purchased it. Teltech has about 300 corporate clients on retainer and revenue for the trailing 12 months ended May 31, 2003, was approximately $8.4 million.
FIND/SVP currently operates in two business segments: a Quick Consulting and Research Service (QCS) that provides retainer clients with access to staff expertise and information resources as well as a Live AnswerDesk service, and a Strategic Consulting and Research Group (SCRG), which provides more extensive, in-depth custom market research and competitive intelligence information. QCS provides about 90 percent of the company's revenue; SCRG 10 percent.
Its primary market consists of medium- to small-sized companies as well as some departments within larger corporations. According to its financial report, "At Dec. 31, 2002, there were 1,563 retainer clients, an 8.6 percent decrease from Dec. 31, 2001." The company's revenues have been declining the last few years.
But, the situation looks to be improving slightly. For the first quarter of 2003, the company reported its revenues increased 1 percent to $5.1 million, and net income was $45,000 as compared to a net loss of $473,000 in the comparable quarter of the prior year. In announcing the results, David Walke, CEO of FIND/SVP stated: "Through diligent attention to gross margins and cost control, we are maintaining profitability in the face of a decidedly challenging revenue generation environment."
FIND/SVP currently has a staff of about 160 (not counting Teltech), which includes about 80 consultants and researchers. Through its licensing agreement with SVP International, FIND/SVP is associated with a network of companies and correspondents providing similar services. This enables FIND/SVP to obtain information for clients through the use of approximately 1,000 additional consultants in the SVP worldwide network.
The companies see very little client overlap with Teltech's focus on R&D and engineering departments of larger clients and FIND/SVP's focus on marketing-related functions of its clients. Walke said: "We will have evolved from an organization largely dependent on one service to a dynamic company offering a host of quality, value-added business intelligence services. We believe this provides us with a distinct competitive advantage, as existing and prospective clients can now address more and more of their knowledge service requirements through a single relationship with FIND/SVP."
Walke feels the acquisition will provide important operational and financial synergies. He stated: "For example, Teltech will leverage the national sales force and marketing efforts of FIND, and in turn FIND will further its portal development and outsourcing programs through the application of Teltech's proven technological and strategic competence. In addition, FIND/SVP will recognize very substantial cost synergies through database access efficiencies and other identified savings."
Consolidation of companies in this space was probably inevitable, given the current business conditions, and this should prove to be a good strategic decision. Anthea Stratigos, president and CEO of the advisory firm Outsell, Inc. (and a former vice president at Teltech), said that the companies' core competencies are very complementary and so this is a good acquisition for FIND/SVP. Commenting on the Sopheon ownership, she noted that Teltech's support for content in Sopheon's product development solutions was a good fit. However, at the core of Teltech is its outsourced research business, which she said did not fit Sopheon well. "It was a round peg in a square hole." She continued, "FIND/SVP is a preeminent player in this business - if any company can make it fit, they can."
Some industry observers wonder, though, about the potential for growth in the custom research market, given the pressures of decreased corporate spending and increased information access via the Internet. FIND/SVP also competes with independent information research providers and indirectly with internal corporate staff. With the acquisition, FIND/SVP will definitely have more pieces of the pie, but it could be a smaller pie than before. In addition, Stratigos indicated that outsourced research is a difficult business model. "There's no leverage," she said, "and it's difficult to execute. But," she added, "outsourcing is not yet a dead phenomenon."