Dear merchant banks, which are regularly harassing me, this friendly post is addressed to you as an answer to your constant questions on the “external growth” options for Pentalog.

How is it that Pentalog, major player in the offshore nearshore outsourcing sector, continues to ignore the numerous buyout opportunities offered by all merger and acquisition operators on the Paris market?
It has been my long-time belief that external growth has many detrimental effects for any company that generates an average organic growth above 30%. We have never gone below this level since 2005! Why in the world do you want me to risk upsetting this rhythm by dealing with the political throes of a merger? Without mentioning that the value of the companies that you present is always overestimated, which doesn’t encourage me to pay attention, nor even to take you seriously with regard to the advice that you might lavish on me. This year, we will normally increase our sales figure by 5 to 6 million euros, with a rise in our working capital requirements by less than 800,000 euros and an immediate marginal profitability above 12%! Any company that you may suggest which has a sales figure of 5 million euros will be offered to me for a price ranging between 2 and 5 million euros, with an EBIT between 5 and 8%! Why should I go through such trouble with a risk of breaking the virtuous mechanisms, for an uncertain benefit and a capital cost multiplied by 3 to 6 times?

I will add that throughout all these years, I have developed a taste for customer service, which makes me shun this type of strategy. What is never said is the fact that buying out IT companies doesn’t lead to greater responsiveness towards existing clients. The company which is bought generally has its own backlog, which makes it impossible for old clients to access the new resources! A Pentalog client doubles the amount of its orders almost every year. If I were to allocate my cash flows, or increased capital, to external growth operations, I would proportionally reduce my working capital available and necessary for fueling the growth of my existing customers… therefore doing a disservice to them in the end.

Not only is this choice inappropriate for Pentalog, but it is also a choice that hasn’t been made by any of the high-performance offshore nearshore outsourcing companies that I know of. We generate a high and profitable growth and our structural productivity parameters greatly exceed those of the other Western IT companies. Do you know that the committed costs (per invoiced employee, all the way up to the CEO level) of premium IT companies in France is situated between 1,500 and 2,000 euros/month, while at Pentalog they will go below 1,000 euros in 2011 or 2012? We will achieve this although our onsite staffing services make up for less than 10% of our sales figure, as part of an all hosted model, which is a lot more capitalistic, however. Our current position, from a scale economy perspective (which is often at play in models of merger between French IT companies) is therefore very favourable, as well. Western resources that we are interested in have a higher level than those that you offer, and are only to be found in the fields of project management and consulting. Our French development relies only on adapting the volume of our management and consulting human resources. Our almost unique position as a Western offshore pure player has turned us into a complete “Demand Catalyst”, according to my friend Benjamin Cernes, who is also a strategy consultant and merchant banker. He means that Pentalog doesn’t look for clients, it receives orders. Which is true, as we only have four sales managers out of a total staff of 650 employees.

External growth will be taken into account, dear merchant banks, when Pentalog’s internal growth rate sinks below the 30% threshold on a long-term basis or when the company value bubble which has developed over the last few years explodes. We will also consider this matter when, before contacting us, you study our company, what its ontologies are (and this isn’t difficult, given all the information we post online in complete transparency). How do you want to convince me if you offer outdated models (technical assistance and small-scale fixed-price projects), which aren’t compatible with our Business Model and for 20 times the value of their EBIT for the last fiscal year? I am not buying it. Your business should rely on strategic analysis models, particularly at a time when the offshore sector, the cloud, the 35 working hours, the economy modernization law… have had lasting effects on behaviours and economic ratios of the sector.

In short, I would like you to consider me as a particular case, as early as your next call. You are not selling mobile phones! All of this doesn’t prevent me from closely analyzing your own field of activity . To be continued…