Rochester, Kent -- Earlier this month, I visited Tony Grellier, the Managing Director of MMT Computing(LSE: MMT). The company, a small IT consultancy and services provider, is the most recent addition to the Qualiport. The main attractions to the company that led to the MMT Foolish portfolio purchase were two-fold.
Firstly, there was the company's superior financial record. And secondly, there was MMT's relatively cheap market rating when taking into account the long-term performance to date. Of course, cheap market ratings don't usually appear without a reason. The impact of the Millennium-inspired IT slowdown has hampered recent profitability at MMT, the group's recent interim results bearing the brunt of the sector downturn.
As co-manager of the Qualiport, and a personal shareholder of the company too, I was keen to find out whether the historical record, described in this feature, could be maintained after Y2K. Also, I was eager to hear about the impact of the recent industry slowdown and other question marks I had raised in this post-purchase MMT Qualiport article.
In the beginning...
Grellier explained how MMT was founded by Mike Tilbrook in 1978. The group took its business model from the successful Cap Gemini IT services company, with MMT initially recruiting most of its employees from its larger role model. Grellier explained that "the original aim of the company was to try and do what Cap Gemini did, focus on blue-chip clients with high quality staff, offering very competitive fee rates and achieving high staff utilisation rates as a result of that."
Grellier joined the company in 1987 as the group expanded by broadening the industries it could serve and the IT skills it could provide. Through a mixture of organic growth and acquisition, he described how MMT moved from having once been a "bodyshop" -- MMT just supplying suitable IT staff to clients as required -- to increasingly being a more value-adding IT solutions provider. A solutions provider that "really assists clients to apply IT to improve their businesses and their business processes," as Grellier eagerly pointed out.
Management changes
After overseeing the group's great long-term record, Mike Tilbrook stepped down into a non-executive role last year. For investors, this move did cause some concern. Would MMT lose its recipe for success through the top-level management changes? Grellier highlighted that circumstances at MMT, as the company grew, required a slight change in management style. "Mike probably recognised that things were changing and that his autocratic founder style, not that it was wrong, wouldn't be as easy to sustain going forward. We now have a more conventional approach to management."
Although management styles may differ, shareholders would no doubt be interested in any plans to change the underlying historic nature of MMT. Very reassuringly, Grellier remarked without prompting on this key point. He comforted: "We try very much to preserve the principles he (Mike Tilbrook) has laid down. Not to be a company that is extravagant or throws money at things for the sake of gloss. Looking to give our clients good value. Those basic principles -- we should stick to." This is very heartening for investors.
Acquisitions
The history of MMT led the conversation onto the subject of recent corporate activity. The group has made two material acquisitions over the past couple of years, one of which has turned out to be a success and the other is classed as "disappointing".
The success has been the purchase of an IT consultancy for the energy industry. The disappointment was a derivatives systems supplier. With the subsequent divergence in performance, it was very illuminating to discover how MMT's path had crossed with the two acquired businesses.
Grellier recounted how MMT initiated the purchase of the energy consultancy: "We had started a business relationship with them, saw the opportunity and suggested to them that we make the move. So it was a company that we knew". Compare this business familiarity with how MMT came across the derivatives operation: "Cortex was one of the many you get sent a prospectus for". This, I think, adds weight to the basic investment adage that having a greater knowledge of a business leads to greater investment decisions and performance.
Investment prospectuses
So what does Grellier look for when considering these investment prospectuses? Very encouragingly, he takes no "pie in the sky" attitude. "You look for value. Simple things. First question -- why are they selling?" he advises. Reading between the lines a little, and looking at recent comments from the company, you do get the feeling that MMT have been sold a dud with the prospectus-inspired derivatives business.
And as for similar purchases? "The issue is finding the right acquisitions, and how much time you want to spend on that activity, as opposed to the other things that MMT could be doing" Grellier counsels.
But with cash balances as they are and previous acquisitions having a material share element, nothing appears to be on the immediate horizon. "The share price wouldn't encourage you to print paper", Grellier states, perhaps implying some market undervaluation.
Clientele
Although only a small operator, MMT has a primary focus on serving only the largest of companies, examples being Marks & Spencer(LSE: MKS), Lloyds TSB(LSE: LLOY) and Railtrack(LSE: RTK). Grellier points out the financial benefits of such a strategy: "Blue-chip companies pay their bills and they tend to have lots of repeat business. Once you've got in the door, they are valuable clients to have. Whenever you stray away from the blue-chips, you tend to worry about credit control and all those sorts of things."
But what about the prospect of being financially bullied in the negotiations by the larger corporations? "That does come back to being able to demonstrate that you can add value, that you have some niche attributes" Grellier explains, informing that commodity or contract suppliers tend to come under "almost ludicrous levels" of margin pressure.
Grellier delved deeper into how MMT can add value for their blue chip clients: "If you're talking of the supply of people, then it's probably to predominantly supply your own people and do that at a competitive fee rate. If it's in terms of providing solutions in one form or other, then I think it's your knowledge of the industry." An example of the value-adding knowledge is given with the acquired energy business: "It has got consultants that have probably a better understanding of the (electricity industry) deregulation than their clients" boasted Grellier.
Indeed, the business knowledge gathered from the IT work is leading MMT to receive additional industry consultancy assignments. Grellier elucidated on the gaining of this additional work: "We are becoming increasingly successful in the insurance sector, with a management consultancy team that is very strong. That starts to generate a lot of spin-off business. It (management consultancy) gets you into the businesses at a higher level than traditionally has been the case for MMT."
