Kirk Laughlin
Top executives exit the Brazilian IT provider while reports swirl of a crisis approaching. Mitsubishi still stands behind its investment.
By Edileuza Soares
In the space of a month, Politec, one of the biggest Brazilian IT outsourcing companies has lost the leading executives of its US branch. President and CEO, Peter Albers, (#11 on the 2010 Nearshore Americas Power 50 Ranking) and VP of Sales, Marketing and Alliances, John Edwards, have left the company after two years in command of operations. While deciding upon replacements, the subsidiary is once again being driven by Brazilians with experience in the international market. The defections, along with widespread talk of Politec being in trouble, have industry observers watching to see if another shoe is about to drop.
Vice President of Politec head office in Brazil, Edenilson Fleischmann, will temporarily take over the role of CEO of its American subsidiary. His team includes Senior Vice President of Corporate Affairs, Dalton Luz, who led the entry of the firm into the North American market. Luz was head of operations until June 2008, when Albers and Edwards were contracted to take part in the company’s repositioning process, signaling changes both in Brazil and abroad.
Rumors denied
The departure of the US Politec execs gave rise to rumors that the firm is in a crisis and causing discontent to its shareholder Mitsubishi Corporation for declining revenue. The Japanese group earlier chose the Brazilian firm as its favorite ally in expanding global IT business opportunities. This includes servicing firms within the Mitsubishi conglomerate, one of the largest in the world with around 500 companies and a presence in 80 countries. Politec was chosen primarily for its expertise in rendering IT services to the financial sector.
However in an interview with Nearshore Americas, executives from the Politec head office in Brazil denied that there were problems globally or with their US branch. The justification for the departure of the two top executives was that both had received better proposals. “It’s important to highlight that the operation is both healthy and profitable”, emphasized Dalton Luz.
In public services, Politec won large contracts such as those with Banco do Brasil and Caixa Econômica Federal, that were of great importance to the company’s revenue. However, these accounts were lost in 2008 due to government changes in the law regarding outsourcing contracts.
Strategic partnership
Politec also denied dissatisfaction from its investor Mitsubishi. The partnership between the two companies began in April 2008, when the Japanese group bought 10% of the capital of the Brazilian company, intending to inject US$ 80 million into the business. (Editor’s note: Mitsubishi was not made available to comment on this article, despite a request from Nearshore Americas.)
Part of the transaction included transforming Politec’s Japanese branch into a joint venture, along with strengthening the company in other markets such as the US. As per the agreement, executive Edenilson Fleischmann who worked for Mitsubishi in Japan was transferred to Politec in Brazil.
With the support of its new partner, Politec then created an aggressive plan for growth. Company president Helio Santos Oliveira began to make plans to double company turnover within three years. In 2007, revenue was around US$299 million according to Politec.
However data reported by the company showed that revenue in 2008 dropped to US $250 million. The EBITDA margin (Earnings Before Interest, Taxes, Depreciation and Amortization) after adjustment was 28.4%.
Another sign of a drop in Politec’s results is in the research “Top 50 – Digital World”, carried out by Brazilian tech magazine Exame in which Politec appears in 48th position in 2009. In the study, the company closed the year with gross earnings of US$ 225.8 million – a reduction of 16% compared with the previous study.
Luz admits that there may well have been a negative variation in 2009 compared to results obtained in 2008, but he denies that the company’s revenue is slipping. “There was not a reduction in revenue and Politec maintained its plans for international expansion”, he said. However he did say the company restructuring process in a number of business units did hamper revenue growth. As part of that process the company began operations in Argentina and Chile and repositioned itself in the US, where it has clients such as Cameron International, Tyson Foods and COMSYS. Politec currently operates branches in all 26 states of Brazil, as well as in the US, Japan, Argentina and Chile, employing over 5000 professionals.
In four decades, Politec has become one of the biggest Brazilian ITO companies competing locally and abroad with multinationals such as IBM, HP/EDS and Accenture. Nonetheless, most revenue is generated inside Brazil, from the country’s dynamic internal IT services sector. Offshore contracts contribute less than 10% to its total revenue.
Public service focus
In public services, Politec won large contracts such as those with Banco do Brasil and Caixa Econômica Federal, that were of great importance to the company’s revenue. However, these accounts were lost in 2008 due to government changes in the law regarding outsourcing contracts.
As a result, Politec needed to make operational changes. “The company underwent a huge process of restructuring and repositioning in the market. Today there is no longer any more influence of these contracts in the company business”, says Luz. In that process, an SAP-specialized company of the Polics group was incorporated into the company in 2008. In 2009 two other companies, Search Tecnologia and Ultracom, were also acquired.
At the same time, Politec was also involved in public auction scandals in the state of Brasília. The company was accused of paying bribes and being part of a cartel to win contracts with the federal government.
Politec is under legal investigation for participating in “Mainframe” operations, along with three other IT service providers (CTIS, Policentro and Poliedro), all part of a group called “The Million Club”.
Failed merger
Amidst these accusations, Politec announced a merger agreement late last year with Chilean service provider Quintec. The combination of the two operations was projected to generate around US$ 425 million in 2010 with contracts inside Latin America. The new company resulting from this merger would have shares floated on the Sao Paulo Stock Exchange.
However a few months after the agreement was announced, suddenly the merger collapsed. Luz says that strategically the business was good for both companies and that it wasn’t closed because they were unable to reach an agreement over the terms and conditions of the alliance. “We would, in truth, have had more Politec business being taken to Chile and Columbia than vice-versa”, he says.
Industry observers believe that, at a high level, the awarding of public contracts in Brazil is becoming more transparent and as a result, Politec is among a number of firms that will continue to feel some pain from losing out on these once coveted deals.
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