Paul Janisch

More on the MS equity equivalent

Further to my post last night, I found an article (written by Duncan McLeod) that goes into a little more detail on the machinations of the equity project.

• The R472m will be spent in roughly equal portions of nearly R70m/year over the seven-year investment period.
• MS plans to spend the R472m helping between five and 10 black-led and black-owned software development houses, providing them with technical, business and marketing support.
• They’ll also be given access to Microsoft resources internationally and offered support in selling their products in markets worldwide.
• It is not interested in pure start-ups, wanting to work only with software development companies with a track record.
• They estimate each of the companies they invest in will have 300-400 people at the end of the seven years.

Worth noting is that

Microsoft’s early research suggests it will get about 200 applications from interested companies. The will probably end up with about 50 that meet the criteria

I find this last paragraph the most interesting.  This tells us that there are at least 200 black-owned software development houses.  This is wonderful news and something that the ICT sector should be proud of (that's when they stop bitching at each other over their BEE Charter).

Two other points and then I go

1. McLeod writes that the company will not take an equity stake in any of the businesses it works with and does not expect any payments in return. It also does not expect a return on its investment, though it expects the initiative will benefit it indirectly later.  I suspect that this last line was something annouced at the press conference.  Brilliant!!!!!!!!!!!!!!!!! It's the WIIFM principle and they are patently obvious about it.
2. And MS SA's BEE rating will be boosted, probably taking it from a level-four contributor to level two

I cannot say enough about this.  If it isn't text book stuff then the text book be should be written around this case study.

MS equity equivalent big deal

This is a big deal and a fantastic one at that.  Microsoft SA has announced their R472m equity equivalent project. 

The project will see Microsoft spending R472 million into helping small, black-owned software development companies grow into global companies by 2017. Participants will be chosen from responses to a nationwide request for proposal, slated for issue in early May. It is expected that between five and ten companies will be part of the initial programme.

This is the real deal, the big cheese, the main man - the mega pantsula.  Build up global companies and they will become huge users of MS products. 

I love this, it uses the WIIFM principle which goes like this

MS has a problem - it needs more BEE points. 

I would imagine that it's got the other seven elements covered.

Solution - equity equivalent

But not any old equity equivalent project.  One that focuses on their products and services and develops a project that does exactly that.  Just like HP did.

Phenomenal.  And this is what BEE is about.  If you have a vested interest in any BEE related activity then it stands a greater chance of success.  And this works across the board.  Don't do it because it is the right thing to do. do it because it works for you. 

Well done Microsoft......... oh and,   Lester were you involved in this at all?

Oh yes another mantra

ASK NOT WHAT YOU CAN DO FOR BLACK ECONOMIC EMPOWERMENT, BUT WHAT BLACK ECONOMIC EMPOWERMENT CAN DO FOR YOU

Two new equity equivalent projects

Two new projects were announced last week. 

Liebherr Africa (Pty) Ltd, a Swiss multinational operating in the manufacturing industry, will partner with Ikhaya Fundisa Techniskills Academy (Pty) Ltd (IFTA) to form the  Liebherr Training Academy which will train 75 students per annum over a six year period, where the students will then be placed in gainful employment within the engineering field following completion of the relevant training programmes. 

Hansen Transmissions (Pty) Ltd will establish the Ulwazi Express, which is to deliver knowledge and information to people in disadvantaged communities in both rural and underdeveloped urban areas (particularly the youth) by providing them, amongst other things, access to educational material with a special focus on mathematics, science and life skills, as well as facilitating youth participation for creative industries. More importantly, by enhancing the digital infrastructure in underdeveloped areas, the Ulwazi Express will be making the delivery of other media content possible thus going a long way in bridging the digital divide.

These projects will entitle both multinationals to 20 points under the ownership element of code 100 of the Broad-Based Black Economic Empowerment (B-BBEE) codes of good practice.

What is worth noting is that "the initiatives will be monitored by the Department of Trade and Industry on a quarterly, bi-annual and annual basis, through the Equity Equivalent Investment Committee."

I was unaware that such a committe exists.

If you want to know more about the subject I found Hennie Uys' blog - he's put up a good write up on equity equivalents.  I didn't know about this blog - it looks quite good.

Get a little more on HP

I was thinking that when my Dell finally packs it in I would get a HP.  They have been praised from the rooftops for dong this.  Even old jungle jim has offered his two cents in today's Business Day (I know I said I wouldn't talk about him anymore but he is all over the newspaper all the time - I feel it is right to honour him.   However I will keep quiet when he shoots his mouth off in October when the new EE reports are due). 

The best commentary I have read so far came off the Opinion and Analysis section of the Business Day.  The commentary makes the following very significant points:

• There was a strong likelihood that major international IT companies, whose South African operations are estimated to amount to about 1% of their global turnovers, would disinvest rather than share valuable intellectual capital with unwanted partners. In most cases disinvestment would have increased domestic technology costs while reducing employment and the transfer of skills to locals.
• Given the way BEE has evolved in SA, there is also a case to be made in favour of employment equity, skills transfer and affirmative procurement as the most effective means of improving the lives of ordinary South Africans, since so many equity transfers have served only to enrich already empowered blacks.

Regarding the first point,  the dti has always had to tread a fine line between encouraging foreign direct investment and scaring it off by insisting on equity.  I always wondered whether our immediate neighbours (other than Bob's fiefdom) were not making overtures to some multinationals encouraging them  to move shop there because of BEE.   Some multinationals will still find themselves looking for local equity representation - the financial sector is one example where both Deutsche Bank and Merrill Lynch have done equity transactions.

And the second point - anyone who has ever studied the rudiments of B-BBEE would regard this as obvious - it's a pity that so many people in government and corporate SA don't.

The dti gets a lot of flak (much of it well-deserved) for their various initiatives.  But this time they have performed beyond expectations.  Well done to them. 

The rubicon is crossed

The floodgates have opened.  HP are the voortrekkers of equity equivalents ek se.  The front page of this morning's Business Day announced the news  boldly - HP gets BEE equity exemption.  Its equivalent plan is to set up the HP Business Institute.   

The institute, to be launched in November, is expected to train about 300 small black information technology (IT) businesses over seven years. It will upgrade skills, bring unemployed graduates into the sector and provide for job placement . The first class will begin in February.

You'll also notice that the programme is focused on skills development, and I am willing to bet that these skills will be largely orientated around selling or supporting HP products.  This is the only way to do it.  Train people to sell your products and help them become successful.

This is very good news because it means that the dti at least knows how to evaluate these applications and in some cases actually award them. And with Lionel October leaving the department  there isn't much left there to be confident about. 

Perhaps the beleaguered department would like to adopt Delton van Rooyen's witty ode to the humble postman.  Delton was on the JHB leg of Idols (Kath and I have done nothing but watch this show for the last week), and he performed a song called "we deliver whatever it takes".  Click on this link and go to page 2 and then select "The Mail Nurse".   

If you happen upon Cliff Jennings first then you would do well to watch his "I wanna" video.  There is also an hysterical introduction to Cliff (and a few other clips) on YouTube

Multinationals

I had heard nothing about multinationals applying for equity equivalents.  But the Business Day tells us that numerous companies have submitted proposals to the DTI.

“A lot of them have come with proposals to us on equity equivalents. These include Hewlett Packard, IBM, pharmaceutical companies, and the German Chamber of Commerce and Industry on behalf of German multinationals, and we have also recently heard that the automobile multinationals have plans for alternatives,” Lionel October said.

This is very good news.

Selling off assets

Two recent articles in different publications discuss the sale of a company's assets and the implication this will have on the seller's BEE status. There are different rationales behind each transaction.

The first one was in Business Report on 16 October, 2006.  Caxton may hive off non-core assets in BEE move. 

"Caxton is considering hiving off some of its assets into a separately listed vehicle in a move designed to introduce black economic empowerment (BEE) shareholders to the company. The group's core assets are in newspaper publishing and printing, and magazine publishing. Caxton also has commercial printing operations and academic publishing, packaging and stationery." (my italics - I assume these aren't core assets)

The second one was in today's Business Day - Ngcaba drives BEE spinoff at Didata units

"DIMENSION Data has spun off two small operating entities into a separate company to give them empowerment credentials and growth opportunities."

Sound business reasons are the driving forces behind both transactions.  Caxton is living up to the old  "stick to your knitting" cliché, but they have recognised that these non-core assets do have a business value to a potential buyer.  Dimension Data (or DimDat as we used to call them) are looking for growth opportunities in government and Africa.

And the BEE impact?

Glad you asked.  Code 100, statement 101 allows companies to sell assets or enterprises within the group to generate points on the equity scorecard.  This new entity is known as an associated enterprise.

There are a few rules:

• the transaction must create a sustainable business
• there must be transfer of specialised skills/productive capacity to black people
• the associated enterprise must be able to procure clients other than the initiating enterprise
• there must be no onerous outsourcing arrangements made with the initiating enterprise

Once the transaction is concluded the initiating enterprise (seller) is able to claim points on their own equity scorecard.  These points are based on the percentage that the value of the associated enterprise contributes to the total valuation of the initiating enterprise.  The standard code 100 rules apply thereafter (these refer to voting rights, economic interest etc).

I love this kind of transaction.  The initiating enterprise's emotional attachment to the associated enterprise is diminished and the new owners are provided with a lot more freedom to be owners.  All gain in the short and long term.

If you are considering this kind of transaction read statement 101 carefully.  You can't flog off some old dog and think you are going to get away with it.  Also if you are looking to get involved in a business as an equity partner this is a great introduction.