Troubled consulting firms can hold out their hands, but it's become survival of the fittest.
Internet consulting companies are doing everything they can to raise cash in order to survive the dramatic pullback in IT spending.While the lucky ones with enough staying power are looking for buyers or cash infusions from various sources, others like US Interactive have no steam left.
On the hunt for buyers, Scient Corp. is rumored to be looking for a suitor and may be in talks with Computer Sciences Corp. Both companies refused to comment.
Still, creativity abounds in the way that some of the cash-impaired consultancies are looking to stay alive. After several rounds of layoffs, sales of assets and the formation of a new strategic partnership with HCL Perot Systems, iXL Enterprises has also sold $15.8 million worth of new shares.
MarchFirst recently sold its Midwest consulting operations, the former Whittman-Hart, its hosting business and its SAP practice to Divine Inc. The deal calls for Divine to pay $12.5 million in cash and a $60 million note, and the possibility of more money if the units perform above expectations.
For MarchFirst, those sales and the layoff of another 1,700 employees leave it with about 3,000 employees, or one-third its total last fall.
Its too soon to tell whether these two consulting firms will stay afloat or descend to the depths of PSINet. PSINet executives last week suggested that a bankruptcy filing may be on the way, even if it succeeds in selling off assets and restructuring debt. Last week, it completed its sale of PSINet Transaction Solutions to an investment group for $277 million.
Analysts say the cash-flow problems will leave few players standing. "The consulting sector is beginning to look a lot like CBSs Survivor, " says Michael Sherrick, an analyst at Morgan Stanley. "With each week that passes, fewer players will remain."
Despite the quicksand that some of these companies are standing in, iXL believes it will be among the survivors, says CEO Christopher Formant. "Were not burning cash. Were coming out of transition in a major way, and all the bad news is behind us," explains Formant, a former executive at PricewaterhouseCoopers who joined iXL on Feb. 1.
Analysts like Steven Birer of Robertson Stephens & Co., however, doesnt buy it. "IXL has always been extremely positive but has done little to back that up with hard facts
Its tough enough to change a company at any time and extremely tough in the environment were in," says Birer.
IXL says it has taken deliberate steps to cut costs and improve cash flow. It has sold back part of its stake in ProAct Technologies for $20 million and is in the process of unloading its venture capital holdings. To reduce its cost structure, iXL has entered into an offshore services pact with HCL Perot Systems, which bought $3 million worth of iXL stock in exchange and has spun off its German and Dutch operations.
The company also renewed a $50 million credit facility with Chase Manhattan Bank, reopened a window for senior executives to buy shares on the open market, and refocused services on a handful of vertical markets: travel/transportation, financial services, and retail/consumer packaged goods, Formant says.
Now, Its War
In its latest move, iXL issued 15.875 million restricted shares at $1 each to a group of investors that includes two principals of Kelso & Co., its largest investor; the chairman of CCA Industries, a beauty-aid provider whose stock was recently delisted from the Nasdaq; and the president of KJ Investment. The new stock issue increased its outstanding shares by about 20 percent.
IXL is moving "very aggressively" to sign up new clients, grab market share and drive out some of its competitors, Formant says. To that end, the company started an internal promotion last week, offering cash and prizes to employees that win business from competitors, using the line, "Now, its war," from the movie Gladiator.
IXL is also"trading up" employees, replacing less-talented staff with those more qualified. The company currently has about 1,300 to 1,400 employees, all but 200 of them billable.
It has $50 million cash on hand, the same level it had at the end of Q4, says Formant, adding that iXL will achieve positive earnings, before interest, taxes, depreciation and amortization during the first half of the year.
"Im surprised to hear that," says Mayank Tandon, analyst at Janney Montgomery Scott. He doesnt expect the consulting sector to bottom out for another two quarters.
Mark DAnnolfo, analyst at Deutsche Banc Alex. Brown, says consultancies like iXL and MarchFirst are deconstructing themselves into the parts they once pushed together, keeping some assets for themselves and selling the rest. "IXL and MarchFirst may survive, but they wont be the companies they once were," he says.