InformationWeek

October 18, 1999

Financial Update:
Consulting Firms Tap Stock Market
Money fuels E-business expansion and acquisition of app-hosting companies

By Jennifer Mateyaschuk

he Internet professional-services market will reach nearly $80 billion by 2003, according to analysts, and technology consulting firms are increasingly turning to the stock market as a place to raise capital to purchase other companies in an attempt to seize a slice of the market. Thirty-two consulting firms went public in the third quarter, and others, including Collegis Inc. and Cysive Inc., have registered for initial public offerings.

Analysts say the flood of IPOs by consulting firms is being driven by their desire to raise money to expand into services such as application hosting and to acquire other consulting firms so they have the resources to handle larger E-business projects. It's also being driven by the need to offer full E-business services to customers. "Everyone wants to stake out as much territory as they can in this space because there's the belief that E-commerce is the way of the future," says Michael Erbschloe, director of research for Computer Economics Inc.

Erbschloe says there are no clear leaders in the Internet services market, which includes applications hosting and services related to E-business. In addition, the technologies to handle both tasks have become increasingly complex. "Anyone can build a Web site," he says. "Users are looking for companies that can build their Web site, integrate it with legacy systems, understand the business strategy, and help with branding and marketing issues."

Breakaway Solutions Inc., a Web-hosting, E-services, and application service provider, went public Oct. 6, raising $42 million. In February, the company secured $8.3 million in venture capital. It used that money to expand its staff through recruiting and acquisitions. In March, it merged with Applica, an E-business services provider that also hosts customer-relationship management systems. In May, Breakaway acquired WPL Laboratories, an Internet solutions and consulting firm, and in June it merged with WebYes, an Internet application outsourcing and deployment company.

Breakaway president and CEO Gordon Brooks wouldn't say whether the company will use the funds from its IPO to acquire more consulting and services firms. But in its filing with the Securities and Exchange Commission in July, Breakaway said it would use proceeds for "working capital and other general corporate purposes, including possible acquisitions."

Analysts say most consulting firms issuing IPOs are looking to do the same. "These companies want to keep acquiring firms to expand their consulting staff, because experts in this field are hard to find," Erbschloe says. "In addition, by issuing an IPO, they're able to give employees stock options to help increase employee retention, as well as use the stock to formulate more partnerships with other vendors."

Razorfish Inc. did just that. After going public in April, the company acquired i-Cube Inc., which provides E-commerce consulting and integration services, in an all-stock transaction valued at about $677 million.

Before that acquisition, Razorfish acquired five consulting and integration firms. It's also using IPO proceeds to increase employee retention and recruitment. The company plans to expand its human-resources department, hire additional IT personnel, develop its sales and marketing department, expand into international markets, and perform internal systems upgrades.

Other companies that went public this year include Braun Consulting, Luminant Worldwide, Scient, and Viant. Many of the IPOs have done well. Cysive, a provider of engineering support services for large-scale E-business operations, is expected to issue its IPO soon, priced between $11 and $14 per share. The company said it would use the funds to expand its business and increase its sales and marketing presence.

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