Complete Business Solutions, Inc.

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Complete Business Solutions, Inc.

32605 West Twelve Mile Road
Farmington Hills, Michigan 48334-3339
U.S.A.
Telephone: (248) 488-2088
Fax: (248) 488-2089
Web site: http://www.cbsinc.com

Public Company
Incorporated: 1985
Employees: 4,800
Sales: $376.6 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: CBSI
NAIC: 541511 Custom Computer Programming Services

Founded in 1985 as a contract programming firm, Complete Business Solutions, Inc. (CBSI) has grown through a series of strategic acquisitions into a leading provider of information technology (IT) services. The company’s 1997 initial public offering (IPO) was one of Wall Street’s most successful, with the value of the newly issued shares rising an incredible 262 percent within nine months. By 1999 CBSI had about 500 customers, with 70 percent of them mid-range companies with revenues of $500 million to $4 billion. Other major clients included the Big Three automakers General Motors, Ford Motor Co., and Chrysler Corporation, and several state governments.

Good Clients Help New Firm Grow: 1985–90

CBSI was founded in 1985 as a contract programming firm by Rajendra Vattikuti, a native of India. After earning a bachelor’s degree in India, he graduated from Detroit’s Wayne State University with master’s degrees in electrical and computer engineering. From 1983 to 1985 he was a management information systems project leader for Chrysler Corporation. Chrysler was one of CBSI’s first clients, providing the firm with $200,000 in revenues in 1985. By 1996 Chrysler would account for $7.5 million of CBSI’s revenue.

The firm started with 20 employees and earned $432,000 in revenues in 1985. Initially, CBSI hired out computer consultants to clients as needed. In the 1980s many firms were cutting back on their internal computer departments and hiring outside consultants to develop software and solve information problems. CBSI was called in, typically, when a company experienced some type of computer problem. CBSI’s consultants would fix it and remain available for follow-up service as needed.

Another early customer was a Belgian banking network firm called Swift, which had offices in Washington, D.C. Swift did interbank networking for about 3,000 banks. When its system needed an overhaul, it called in CBSI. Vattikuti told the Detroit News, “We grew to 50 people on that account. It was a good cash cow for us.” Swift paid in advance and helped CBSI avoid going into debt.

In 1990 Vattikuti noted that 70 percent of CBSI’s business was repeat business. The company tried to provide “a total long-term solution” to each customer’s problem, not just sell them some software. Its biggest clients included the Big Three automakers (General Motors, Ford, and Chrysler), as well as the state of Michigan. By 1990 the firm had grown to more than 300 employees. Revenues for 1989 were $18 million, a five-year compound growth rate of 92 percent. The firm had established regional offices in Chicago, Dallas, San Jose, and Connecticut. In April 1990 it opened an office in London, England.

Developing into a Computer Consulting Firm in the 1990s

CBSI was relatively unknown until the Y2K problem brought increased recognition to a lot of information technology (IT) companies. During the 1990s CBSI developed into a computer consulting firm that helped companies apply new technology to gain a competitive edge. CBSI’s growth during the 1990s would far outpace Vattikuti’s 1990 prediction that sales would reach $120 million by 2000.

In 1991 CBSI opened an off-shore service center in India to tap the expertise of Indian computer programmers and technical people. The service center gave CBSI access to computer programmers at wage levels lower than those in the United States and provided the company with a 24-hour work force. CBSI’s global presence would be a positive factor in its later acquisition of smaller Information Technology (IT) service companies. CBSI later opened a second service center in India and in 1999 established another off-shore service center in the Philippine Islands.

In 1992 CSBI gained another major client, grocery retailer Spartan Stores Inc. It provided CBSI with $200,000 in revenue in its first year; by 1996 the account had grown to $4 million. CBSI had grown to about 600 employees in 1993. It kept supervisors to a minimum, with only one layer of management between the CEO and the lowest-level consultant. It created a loyal group of managers by providing training to encourage entrepreneurship and leadership.

Revenues continued to grow steadily in the first half of the decade without any significant acquisitions. Revenues increased from $32.4 million in 1992 to $83.2 million in 1996. About 15 percent of the company’s business came from automotive companies. Other clients included Spartan Stores Inc., insurance provider UNUM Ltd., the state of Nevada, and Citibank. Helping clients with Y2K computer problems accounted for just eight percent of CBSF’s revenues in 1996, or about $6.6 million.

Aggressive Growth Fueled by Initial Public Offering: 1997–99

In March 1997 CBSI went public at $12 a share. The IPO generated $25.7 million, some of which would be used to grow the company through acquisitions. The debt-free company was in good financial shape. Filings with the SEC revealed that the company enjoyed a 30 percent annual revenue growth for the previous five years as a private company. At the time of the IPO CBSI had 1,500 employees, 500 of them overseas including 450 in India, and 1,000 in the United States including 350 in Michigan.

During 1997 the company’s stock rode a wave of Wall Street enthusiasm for companies that fixed Y2K computer problems. For the second quarter of 1997 it led all 85 Detroit-area stocks tracked by Crain’s Detroit Business with a 154 percent gain to $24.75 a share, up from a low of $8.37 in mid-March due to a general decline in the market. The company filed for a secondary stock offering in August 1997 for an additional 2.25 million shares. It was operating in six major areas: contract programming, re-engineering, client-server development, packaged software implementation, information technology consulting, and application maintenance.

CBSI completed the first of four strategic acquisitions in November 1997, when it acquired Synergy Software Inc. of Schaumberg, Illinois, for $31.2 million of stock. CBSI stock was trading at $34.50 a share. Synergy Software provided computer training, installation, and maintenance. It also provided Y2K consulting services. Synergy was founded in 1989 by Carl

DePaolis and Louis Borders as a spin-off of the information technology division of Borders Books and Music.

CBSI expected to transform Synergy into a regional center serving Chicago and Milwaukee. Vattikuti hoped the acquisition would help the company attract more highly skilled computer professionals, which were in short supply. The acquisition marked the beginning of CBSFs strategy to grow through acquisitions, mergers, and business combinations. It added about 100 employees. For 1997 CBSI reported revenues of $123.8 million.

CBSFs second major acquisition took place in January 1998, when it acquired C.W. Costello & Associates Inc. of Connecticut for $72.7 million in stock. For 1997 Costello had revenues of $70.2 million and a net loss of $1.9 million. The acquisition added about 700 IT professionals to the company.

In March 1998 CBSI paid a two-for-one stock dividend. The company’s first quarter earnings report of $. 16 a share beat Wall Street’s expectations of $.12 a share. Prior to the stock split CBSI shares were trading in the $65 range. At the time of the split, company employees other than Vattikuti owned six percent of the company.

CBSI was gaining recognition from Wall Street as a premier IT company for several reasons. It was able to recruit and retain scarce software programmers by developing a team environment. It also was able to buy smaller IT service companies and merge their staffs into its own. The acquisitions allowed CBSI to expand its service delivery capabilities to include on-site, off-site, and off-shore service—whatever the client preferred.

At the time of the stock split in March 1998 about 20 percent of the company’s 2,000 employees worldwide were engaged in correcting Y2K problems in computer code. A typical client may have thousands of programs involving five to 15 million lines of code. Each project could take 16-18 months. CBSI was debugging programs for about 45 clients throughout the United States, including Chrysler Corporation, Ford Motor Co., and the state of Michigan.

In July 1998 CBSI acquired Claremont Technology Group Inc. of Beaverton, Oregon, for some $285 million in stock. Claremont was a leading IT systems integration firm with large and mid-sized corporations and state governments as clients. It was especially strong in enterprise resource planning (ERP) software implementation and client-server technology, two important areas for CBSI. Claremont strengthened CBSFs presence on the West Coast and added more than 600 employees. It also had 16 domestic offices and overseas offices in Canada and Australia.

Company Perspectives:

Our goal is to become the preferred single-source provider of IT [Information Technology] services to an expanding base of clients by establishing teams that quickly and cost-effectively provide industry-based IT applications solutions.

In December 1998 CBSI made its fourth major acquisition. It acquired Sudbury River Consulting Group for $5 million plus potential future consideration. Sudbury River Consulting Group had recently moved to Providence, Rhode Island, in July 1997, where CBSFs northeast operations center was located. Following the acquisition, CBSFs 135-person Providence staff and Sudbury’s 53-person office were consolidated in a new 30,000-square-foot office space in the Foundry complex in Providence. Sudbury was known for its expertise in providing enterprise resource planning, an information technology useful for just-in-time manufacturers.

For 1998 CBSFs financial results reflected the recent mergers and acquisitions involving Synergy Software Inc., C.W. Costello & Associates Inc., and Claremont Technology Group Inc. Revenues rose 37 percent from $275.3 million in 1997 (restated to reflect recent acquisitions) to $376.6 million in 1998. Net income, however, decreased 21 percent from $8.4 million in 1997 to $6.7 million in 1998, with both figures reflecting the recent mergers. The lower net income was attributed to $28.3 million in merger costs and other one-time expenses.

The company’s revenue growth was due to its offering a broader range of services, especially services related to emerging technologies such as data warehousing, electronic commerce, and network services. Chairman Raj Vattikuti said, “Our clients continued to rely on CBSI as an extension of their IT departments and to outsource a broad range of IT services.” As a result of the company’s recent acquisitions, it was able to offer a broader array of services.

Outlook: Beyond the 20th Century

In February 1999 CBSI completed a secondary stock offering of 5.4 million shares of common stock at $31 per share, including 2.1 million newly issued shares. Net proceeds to the company were approximately $60 million. During the first part of 1999 CBSFs stock was trading at lower prices, as was that of other information technology companies. Between January and May CBSFs stock lost about a third of its value. It peaked on January 4 at $33.87 a share and was down to $15.44 in April. Investors were concerned about the transition from Y2K consulting to other services.

After recovering somewhat, CBSI’s stock dropped to $16.37 a share in June 1999 after a negative report that three of CBSI’s off-shore India contracts, each valued at $1 to $2 million, would be delayed, causing CBSI to lower its revenue forecast for the second half of 1999. CBSI noted that the long-term contracts had been replaced with 22 short-term electronic commerce projects worth about $250,000 each.

During the first two months of 1999 CBSI signed 247 new contracts worth more than $70 million. About 37 percent involved electronic commerce and emerging technologies. One $5 million contract was signed with Unum Business Solutions Inc., a Portland, Maine-based insurance provider, to provide two years’ worth of maintenance, development, and support services. CBSI also signed a contract to develop a Web site for Medsite.com, a New York e-commerce site for physicians.

CBSI planned to replace the lost Y2K revenue by focusing on building small computer networks, redoing older computer systems, and developing Internet commerce. These three new lines associated with emerging technologies accounted for 30 percent of revenue. Y2K revenues for CBSI peaked at 19 percent of the company’s revenues in the third quarter of 1998. Employees who had been involved in Y2K projects were receiving training to develop their Internet software writing skills.

As CBSI replaced its Y2K consulting business with information technology consulting and emerging technologies, its operating margins doubled to 12.4 percent over two quarters. These new areas included e-commerce, Internet services, software development and maintenance, applications management, and data warehousing. They represented higher margin businesses than Y2K consulting. Another source of revenue came from the company’s offshore development centers in India and the Philippines, which accounted for ten percent of the company’s revenues in 1998, up from five percent in 1997.

Although CBSI and other IT firms remained under pressure from Wall Street to demonstrate that they can replace Y2K-related revenue, CBSI demonstrated that it could broaden its services through successful acquisitions of other IT firms. Its acquisitions provided CBSI with a broader range of services and strengthened its expertise, and the company had sufficient financial resources to take advantage of new acquisition opportunities in the future. Its customer base of about 500 customers, with 70 percent of them mid-range companies with revenues of $500 million to $4 billion, were likely to continue to utilize CBSI’s skills in such areas as electronic commerce, emerging technologies, enterprise consulting, and IT planning. CBSI also had launched an aggressive marketing campaign to attract new customers.

Principal Competitors

IBM; Andersen Consulting; Electronic Data Systems Corp.; Perot Systems Corp.; Cap Gemini S.A.

Key Dates:

1985:: Complete Business Solutions is founded in the suburbs of Detroit by Rajendra Vattikuti.
1987:: CBSI goes public.
1990:: London office is opened.
1998:: Major acquisitions include C.W. Costello & Associates Inc.; Claremont Technology Group Inc.; Sud-bury River Consulting Group.