Sysdeco to spin off media business as new company

"Troubled history" seems to have been an unlisted liability that has infected Sysdeco Group of Oslo, Norway, following its acquisition of Atex two years ago.

In recent months the company has announced massive losses (see The Cole Papers, May 1996), the resignation of its chief executive (see The Cole Papers, June 1996), the unresignation and re-resignation of the same official (see The Cole Papers, September 1996) and a complex problem involving its stock and a rogue investment banker in the United Kingdom (see The Cole Papers, October 1996).

On Nov. 14, the company sought to distance itself from the problems caused by Atex and the other media businesses it has recently acquired (the former ComIt, Dewar and SyPress Oy) by informing stockholders it would spin off the media operations into a stand-alone company that would be capitalized with rights given to existing Sysdeco investors.

Sysdeco said its goal is to raise $16 million for the new business, which will be based in Bedford, Mass. Plans call for the business to remain privately held for 18 to 24 months, after which it would become a publicly traded company listed "on an appropriate exchange, but not in Norway."

At the same time, the company announced further losses: $10 million on third-quarter 1996 revenues of $17.53 million. Restructuring charges will bring the third-quarter loss to almost $14 million.

Sysdeco said these latest results bring its losses for 1996 to $18.7 million on revenues of $65 million.

Sysdeco also announced that the Oslo Stock Exchange would not compel Deutsche Bank to purchase all the shares of Sysdeco it did not already own, ending the problem caused by the rogue banker.

Rules of the Norwegian exchange require that any company that acquires more than 45 percent of a company offer to buy the shares it doesn't own at the highest price the holder paid in the previous six months -- or to reduce its holdings. That would have put Deutsche Bank's bill at $372 million, or would have required the bank to divest shares purchased at $33 that are currently trading for less than $2.50.

The exchange said that because the shares were acquired by Deutsche Bank's Morgan Grenfell Asset Management (Mgam) subsidiary unawares, it wouldn't enforce the requirement. Deutsche Bank and Mgam now own 47.4 percent of Sysdeco.

The company said it continues to communicate with Deutsche Bank and Mgam as it does its other institutional investors.

New chief executive
The board of directors appointed Larry Mihalchik chief executive of the as-yet unnamed media business.

Mihalchik joined Sysdeco in August, following a long career as a top financial officer at technology firms in the Boston area.

Within days of his appointment, Mihalchik announced that Marlowe Einelund had left the company. Einelund, a longtime Sysdeco executive who was the mastermind behind the company's media strategy, had most recently been president of Sysdeco Media Group.

In an interview a week after the spin-off enterprise was announced, Mihalchik sounded bullish on the new company.

"The media business is a good market opportunity," he said. "It's our job to get the company positioned to take advantage of that opportunity."

Hired as the chief financial officer of the entire Sysdeco business, Mihalchik said he had investigated the company thoroughly before he joined and had "traveled around the world and visited many, many locations to understand the details of the business."

Three things were obvious to him, Mihalchik said: that Sysdeco would have to raise money soon (although "contrary to popular belief, we were not going bankrupt any time soon"), that the right business decision was to split the business, and that once split, the company that needed money would be the media business.

"The business management concerns are quite different for media than the traditional businesses," said Mihalchik. Sysdeco traditionally had been a developer of programming tools that allow the easy development of new applications; it also acquired businesses specializing in geographic mapping systems and systems for health records and communications.

Despite the vision of Einelund and former Sysdeco chief executive Johs Jamne, Mihalchik came to the conclusion that there wasn't much synergy between the traditional businesses and the media business. After two years, it had become apparent that the company's Systemator programming tools were the only traditional Sysdeco products being used by the media business.

"Under the circumstances, that doesn't justify keeping the businesses together," Mihalchik said.

Further, Mihalchik thought that trying to manage the media business from Oslo wasn't going to work either. "If you look at the mix of the business, 50 percent of the media business is in the United States and only 10 percent is in Norway," he said, whereas "90 percent of the traditional business is in Scandinavia."

As lawyers and bankers are beginning to work on the financing scheme for the media business, Mihalchik said the plan is to offer existing Sysdeco shareholders transferrable "rights" to buy into the media business. If a shareholder doesn't want to invest in media, that shareholder would have the option of selling its rights.

"It's going to depend on one's perspective," Mihalchik said. "There may be people who think the right doesn't have enough value to it."

Other Sysdeco insiders said the company's leading active shareholders not only support the spin-off but also plan to invest in the media business.

Why would an investor want to go into a business that's been fraught with upheaval, changes and -- at least for one of the media group's antecedents, Atex -- losses?

"If you want to get a 10 percent return or even a five percent return," Mihalchik said, "then there's probably other places to do that."

But, said Mihalchik, the media business is "the right story for those who understand."

With no previous experience in the media business, how does Mihalchik plan to run the new enterprise?

"By having a team that's very familiar with the media business," he said. "My job is to put together a team. We will find more people to fit together with our team. I'm a big believer in teams."

Further, the new chief executive said he plans to build a board of directors "that's experienced in media not just from the United States, but Europe as well."

While Mihalchik plans to get guidance from customers, it appears the technology business veteran also has some basic plans in place. Mihalchik said his first step is to "get with some of the key players here to make sure we have a product strategy that will work around the world."

He plans to "develop new products and integrate existing products," Mihalchik said. "We will not be successful if we don't have everybody going in the same direction all around the world."

Once the company had established a business plan, he and other executives would travel the world to tell customers "what the business model is and what we're doing for ourselves," he said.

Mihalchik characterized himself as a manager with "a whole lot of common sense and street smarts." He also said that "there aren't many people who understand the details [of Sysdeco's media business] the way I do."

Has Mihalchik been brought in to quietly shut down the businesses formerly known as Atex, ComIT, Dewar and SyPress?

"I'm not a slash-and-burn kind of a person," he said. "I want to grow and improve."

-- dmc

Sysdeco Media Group,
(617) 275-2323,
e-mail: lburke@sysdeco.com.

From THE COLE PAPERS, December 1996, Copyright © 1996, All Rights Reserved.