The Anglo File: A Sage Decision to Team Up With IBM

Sage software and IBM are joining forces to help get British small businesses on the Web.
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The accountancy software firm

Sage Group

did its sums and decided it needed an Internet strategy.

And no half measures for Europe's largest provider of accountancy software, either. Earlier this week, Sage announced it has formed a partnership with no less than

IBM

(IBM) - Get Report

to get its 2 million small business users onto the Internet and doing e-business.

Into The Big Blue Yonder

The first stage is to get all users of Sage software linked to the Web, and then to market via Sage's Web site relevant services and products, including IBM's products such as the Home Page Creator.

On paper, the strategy makes sense and is well timed. Sage is attempting to demystify the Internet for its users, who for the most part are a fairly conservative bunch.

Despite all the hype in Europe about the Internet, for many businesses here it is more of a black hole than an information superhighway; a day doesn't go by without some consultancy or other warning that European businesses are woefully unprepared for the digital age. Only 3% of Sage's 300,000 U.K. users currently have Web sites, compared with 15% of its users in the US.

With its U.S. customers more savvy about the Internet, Sage's ability to offer Internet services and products from a well-known company like IBM, which until now has largely shunned the small business market, should particularly help its expansion in the country.

Sage recently expanded its presence in the U.S. with the acquisition of

Peachtree

for $145 million, and has been largely successful in applying its business model in the country.

"Peachtree used to sell the software and say

au revoir

. Sage's approach is to sell the software and keep on talking," says Nainish Bapna of

Nomura International

.

Sage's margins in its U.S. business during the first half of this fiscal year ended March 31 rose to 22% from 20% in 1998.

HSBC Securities

estimates that for the full 1999 fiscal year, Sage's sales from its U.S. operations will rise 56% and its operating profits will increase 51%. HSBC has an "add" rating on the stock, and had an investment banking relationship with

Tetra

, a company acquired by Sage.

The economics of the Internet strategy look pretty good, as well. Although Sage declined to give

TheStreet.com

the details of the profit-sharing agreement between it and IBM, analysts believe profits from the partnership will be 50-50 -- very generous for Sage, indeed.

Blowing Another Bubble

Sage's Internet announcement coincided with the group's half-year results. For the period, pre-tax profits grew 48.5% to $57.5 million and earnings rose 40%. The confluence of good news bolted the company's stock over 11% to close at 2252.5 pence.

According to a poll of 15 brokers by

Hemmington Scott

, an equity information provider, Sage is now trading at 62.5 times forward earnings. Does it deserve to trade at such a high multiple? Well, not if people are betting on an improvement in the bottom line any time soon from the Internet venture.

As

BT Alex. Brown

noted in a report: "Although

the Internet initiative will not drive revenues in the short term, Sage plans to benefit in the future as customers develop their Internet offerings." The emphasis here is definitely on the long term. BT has a buy rating on Sage, and acts as a broker for the company.

For the most part, Sage has gotten its sums right. However, until there is some concrete evidence that the Internet venture is producing results, investors perhaps ought to be wary of a bubble in the making.