A  BLOW  TO  PHILIPPINE  I.T.  FINANCE

MANILA, January 3, 2005 (STAR) MY TWO CENTSí WORTH By Dickson Co (DFNN.COM) It is a challenge to do finance in the IT business in the Philippines. As you know, local banks and finance companies only lend on hard assets and personal guarantees. Most of the hard assets are servers and PCs. Since technology boxes have short life spans, the loans are shortened accordingly. Having been on the lender side of the equation before, I can understand these finance houses as they have a fiduciary responsibility to their shareholders to make sure the principals of their investments or loans get paid back, that is why the amount of security they require can be quite a challenge. (I have been known to ask for the first-born child as security.)

Soft assets in the IT business include your team of salesmen and programmers who walk out the door at the end of each business day; your proprietary software and your goodwill with your customers who you hope were happy with your past work that they ask you back. Unfortunately, I have not met a Philippine banker who lends on this basis.

Given this challenge, most, if not all, capital in the IT business is raised in the form of equity from angel investors and some institutional venture capital firms. Our company was lucky enough to have a lot of angels.

Last Nov. 24 (the day before the US celebrated Thanksgiving Day), what was already hard just became harder.

A supposed $300-million data hosting company based in Michigan lost its CEO. This CEO shot himself after the FBI and the SEC raided the companyís headquarters a few days earlier.

A data hosting company invests its capital equipment in good 24/7 facilities, in back-up power supply, dependable communication lines, good people and of course, racks and racks of data servers (big PCs). Most companies have realized that it was cheaper to outsource their data center needs to specialists like data hosting centers such as this company.

This CEO was previously convicted of defrauding investors and served three years in federal prison back in 1987. One of the cases he faced before he killed himself involved a $3-million loan to buy 66 servers, but the lender later found out that only 25 were actually bought. As many as 40 other US leasing companies may have been victimized as they probably used the same collateral pool of data servers. It must be the same feeling when 40 other half-brothers and sisters, whom you have never met before, show up at the reading of the will.

How does a company in Michigan affect IT finance in the Philippines? Well, this company bought a 60 percent share in Ayala Port and renamed it Global Data Hub Inc. in late-September.

Epilogue. In a press release dated Dec. 10, the Philippine subsidiary stated that it was confident of its business pipeline. It expects its revenue to exceed P100 million, a 50 percent increase from the prior year. Reputational damage is minimal as the Ayala Group continues to stand behind this company. But the damage to IT finance is hard to quantify as bankers, who are aware of this incident, will now make other IT firms jump through higher hoops and hurdles of due diligence before they approve any new loans.

My Two Cents: In hindsight (being 20/20), could the sellers have done a better job of due diligence? Maybe. From the sellerís perspective, it could be argued that you just needed to make sure that the buyer had the wherewithal and that the money was in escrow before you closed the deal. As I have said in my previous column, "Be paranoid!"

My 2nd Two Cents: Have a prosperous new year! Donít forget the less fortunate.

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Dickson Co is CFO (C is for Cheap) for Dfnn, Intelligent Wave Philippines and HatchAsia.com. For comments or suggestions,
e-mail twocents88@yahoo.com.


Reported by: Sol Jose Vanzi

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