PG NewsPG delivery
Pittsburgh Post-Gazette Home Page
PG News: Nation and World, Region and State, Neighborhoods, Business, Sports, Health and Science, Magazine, Forum
Sports: Headlines, Steelers, Pirates, Penguins, Collegiate, Scholastic
Lifestyle: Columnists, Food, Homes, Restaurants, Gardening, Travel, SEEN, Consumer, Pets
Arts and Entertainment: Movies, TV, Music, Books, Crossword, Lottery
Photo Journal: Post-Gazette photos
AP Wire: News and sports from the Associated Press
Business: Business: Business and Technology News, Personal Business, Consumer, Interact, Stock Quotes, PG Benchmarks, PG on Wheels
Classifieds: Jobs, Real Estate, Automotive, Celebrations and other Post-Gazette Classifieds
Web Extras: Marketplace, Bridal, Headlines by Email, Postcards
Weather: AccuWeather Forecast, Conditions, National Weather, Almanac
Health & Science: Health, Science and Environment
Search: Search post-gazette.com by keyword or date
PG Store: Pittsburgh Post-Gazette merchandise
PG Delivery: Home Delivery, Back Copies, Mail Subscriptions

Headlines by E-mail

Headlines Region & State Neighborhoods Business
Sports Health & Science Magazine Forum

iGate: New name, New way New Economy

Behind the demise of Mastech and the creation of iGate lies a risky, visionary strategy aiming at a new model for a new century

Sunday, March 19, 2000

By Ken Zapinski, Associate Editor/Business

Two weeks after Mastech Corp. shifted its business strategy and transformed itself into iGate Capital Corp., the old name still graces the tech company's Oakdale headquarters.

 
  iGate Capital CEO Sunil Wadhwani: "This is just one step. It ain't like the game is over." (John Beale, Post-Gazette)

That's understandable. This new strategy isn't about letters. It's about numbers.

Consider this: Sometime this summer, iGate Capital plans to raise as much as $100 million by spinning off one of the old Mastech business units into its own publicly traded company called Emplifi Consulting. That would give the new company a value of roughly $1 billion.

That's not bad, considering that the old parent company was only worth $1.3 billion last month before Mastech began to put its grand plan into motion.

And Emplifi is only one of six -- six! -- companies that iGate plans to take public this year as it blows up the old Mastech and converts it into a global portfolio of independent companies, each targeted on a specific niche in helping corporations cope with the Internet economy.

Emplifi, which is based in Oakdale and employs almost 350 locally, helps integrate the ordering, billing, human resources and other large-scale software programs that corporations use so that they can be accessed over the Web. Other companies target Web marketing strategy, customer-care systems and other areas.

iGate Chief Executive Officer and company co-founder Sunil Wadhwani wants to double the size of iGate's original portfolio of nine companies by year's end by creating new ones and buying existing ones. Last week, it acquired a 25 percent stake in Air2Web, an Atlanta-based company that develops Web applications that can be transmitted to wireless phones.

And as he continues along this new path, Wadhwani is looking to downplay -- perhaps even sell -- the original business that gave birth to Mastech in 1986: temporary computer staffing to handle projects at big corporations.

Dell Computer put Austin, Texas, on the tech map in the 1990s, just as Microsoft did with Seattle a decade earlier. "Hopefully, what we're doing will have some of that same catalytic effect" on Pittsburgh, Wadhwani said.

Bold talk about a bold plan, but investors have jumped on board.

Mastech was trading at just under $26 a share before the company started to lift the veil on its new direction by having an India-based software-writing subsidiary, Mascot Systems Ltd., file for an initial public offering in that country on Feb. 25.

As word trickled back to the States, Mastech stock jumped 33 percent in two days of trading. As Wall Street analysts began to get word in early March that a major announcement was forthcoming, the stock jumped another 40 percent.

And then came the actual announcement on March 7. The newly renamed iGate stock climbed 80 percent before settling back slightly. The stock has drifted lower in the days since because of profit-taking and a general slump in the tech sector, but it is still trading at around 50, twice as high as last month.

"The marketplace can better see what they have under their hood, if you will, and that instantaneously increases the value of the company," said Brace Brooks, senior equity analyst at Johnston, Lemon & Co. brokerage firm. "From that standpoint, it's very good."

But future success, analysts said, relies on the management teams at the new companies carrying out their missions while still working closely with their one-time siblings.

The idea is that the smaller companies, each with its own laser-like focus, will be more nimble and flexible in adapting to market conditions and technological change than Mastech, a information technology consulting company with 5,500 employees worldwide.

Wadhwani knows that execution is the key. "This is just one step," he said. "It ain't like the game is over."

What makes Mastech's makeover all the more unusual is that it comes as the company was purring along nicely. Since it went public in December 1996, at a split-adjusted $7.50 a share, its stock had gone up roughly 250 percent. Revenue jumped from $123.4 million to $471.5 million last year. Earnings went up from $8.7 million, or 20 cents per share, to $36.2 million, or 72 cents per share.

This is not a case of Woolworth Corp. shutting its money-losing chain of five-and-dime stores and desperately trying to recast itself as an athletic-wear retailer.

To put it another way, these are not the futile screams of men as their canoe is swept over the falls. It isn't even the furious paddling of men in a last-ditch effort to avoid the waterfall that has just come into view.

It's as if Wadhwani and fellow co-founder Ashok Trivedi, iGate's president, by sensing a shift in the wind, seeing the swirling water and hearing a low rumble off in the far distance, abandoned their perfectly good canoe to continue their journey in a hand-crafted airplane.

It's a risky journey, to be sure. But Wadhwani was convinced that Mastech just wouldn't be able to compete. Now, he, Trivedi and the others they are recruiting to iGate Capital will operate as a sort of New Economy think tank and consulting group.

They will cook up new ideas and nurture them into new businesses. They'll be on the lookout for new acquisitions. And they'll serve on the boards of the various portfolio companies.

All the money-making work will be done by the operating companies. "It's like a 21st-century business model," Wadhwani said.

Said Tim Slevin, an analyst for Parker/Hunter: "They're very smart and capable and have a [successful] track record."

The people who must make the iGate strategy work are the ones who have the most at risk with the new strategy. Sixty percent of iGate is owned by the former Mastech managers who now make up iGate and its various companies, an unusually high proportion for a publicly traded company as large as Mastech.

The shift in strategy also strengthens Wadhwani's standing as the local tech community's most innovative and tireless promoter of Pittsburgh, where he came in 1974 with a degree in mechanical engineering from his native India to study at Carnegie Mellon University.

Last year he unveiled a $50 million venture capital fund (since increased to $75 million) with a priority of financing area startups. iGate is preparing to lead a $300 million to $400 million fund later this year to finance promising technology here and elsewhere. And back when the company was still called Mastech, it began an entrepreneur-in-residence program with CMU, providing office space, support and up to $4,000 a month for six months to students with promising business ideas to give them time to see whether they could launch a viable company.

Wadhwani and Trivedi had no such helping hand when they launched Mastech from Wadhwani's Mt. Lebanon home in 1986. They couldn't get any venture capital or bank financing, so they used their own savings. Things were so tight that a third partner bailed out.

Today, iGate has 41 offices in the 15 largest IT markets around the world and in other global locations, and it employs about 600 people in the region. But after a trip last year to California, Wadhwani saw trouble. He attended a small, exclusive business conference on the Internet economy with the likes of Oracle chairman Larry Ellison, Yahoo! founder Jerry Yang and Scott McNeally of Sun Microsystems. "I came out of there thinking, the Mastech model is not the model for the future."

He started tentatively down the path of creatively destroying the company he helped found 13 years earlier. He established eJiva, which focuses on customer-care aspects of e-commerce, as a separate subsidiary. Then in November he started the venture fund to help develop new ideas in Mastech's back yard. But it still wasn't enough. Then came Thanksgiving.

"I shut myself in my study. I asked my wife, give me three days and let me think." Three months later, Mastech was no more, and iGate showed its face to the world.

The newly christened company jumped $1 billion in value that first day. And make no mistake, the quest for some super-charged market returns is driving much of this strategy.

The Mastech "structure traps the value of high-growth businesses," Wadhwani said. "We have beautiful companies."

But in today's market, developing successful new business lines within a successful, profitable company isn't such a hot idea.

One, the losses incurred in the first couple of years of ramping up a new division hurt a company's earnings, which can batter a company's stock price. Two, even when the new division starts contributing profits, the parent company often doesn't receive very much of a boost.

But in the tech world, where actual profits take a back seat to the idea of what big things might be just over the horizon, the rules are different. Way different.

Nobody expects a tech startup to make money, so the losses that drag down an established company are merely pushed aside. And since potential, not profits, is the measuring stick, there is seemingly no limit to how high stock prices can go.

Which brings us to Mascot Systems, the Web software development company based in India that is preparing for an IPO there. The big question is: How much will it be worth?

Infosys Technology Ltd., a Mascot competitor and the largest firm of its kind in India, trades in India and the United States at more than 200 times its annual revenue. If $50-million-a-year Mascot can hit that same mark, the 80 percent stake in the company that iGate will keep in its portfolio will be worth $8 billion.

Keep in mind, all of Mastech was worth only $1.3 billion when Mascot filed to go public last month. iGate anticipates the India IPO will take place in the third quarter of this year, while American Depository Receipts will begin trading in the United States some months later. But executives said the timing could change because of market conditions or other events.

The promise of hyper-charged stock also gives iGate and its companies something that Wadhwani said Mastech desperately needed -- a way to keep and attract hot tech talent.

It simply couldn't match the stock options potentially worth millions that startups use to hire the engineers and software developers that all tech companies need. Now, each of the new operating companies will have its own newly minted shares and options to dangle in front of prospective employees.

The strategy also gave Mastech veterans a chance to move on to bigger challenges without really leaving the family. Steven Shangold moves from Mastech's No. 3 position of senior vice president of U.S. client services to CEO of Emplifi, the consulting company that will be the largest of the spinoffs.

Its 1,500 employees do "the heavy lifting" of integrating corporate operations with the Web, he said. It's one thing to design a pretty Web site where a customer can order a widget. It's quite another to link that Web site so that it automatically alerts the production system about how many widgets are needed, talks to the inventory system to make sure there are enough supplies on hand and makes sure the new widget gets shipped to where it is supposed to go.

Shangold said he had hoped someday to be CEO of Mastech. But that would have required Wadhwani and Trivedi to step back, which means it would have been a long way off, if it happened at all. But after eight years at Mastech, Shangold said, he was itching for a new challenge and might have had to leave.

Instead, he can lead his own company, which has about one-third the sales of the old Mastech.

iGate shareholders will also be able to share in the wealth of the new IPOs. A percentage of the stock will be made available to them for purchase at the IPO price. "That, to me, is huge added-value to iGate shareholders," Wadhwani said.

Analyst Brooks said the shift in strategy is a graphic example of the contrast between the old economy and the new economy. Mastech was a company whose stock value was tied to growing sales and real profits. As iGate, it is a holding company that will be valued on the promise and potential of the investments it holds in its portfolios. "Now you're betting on market psychology," he said.

Similar strategies have paid off for Internet Capital Group of Wayne, Pa., and CMGI of Boston, which have created investment portfolios in Internet companies such as MetalSite and Lycos, respectively.

"If I'm an old-style investor, I'm not nearly as comfortable," Brooks said. "At the operating level, you're making brand new bets. A lot of them."



bottom navigation bar Terms of Use  Privacy Policy