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Louisiana tax credit convinces Isis Capital to relocate to New Orleans
Source:
nola.com
- Feb 15, 2012
By Jaquetta White, The Times-Picayune
The Louisiana tax credit program that state officials have touted as the key component in luring high-profile software firms Gameloft and Electronic Arts to Louisiana has attracted the attention of a Connecticut firm that intends to move three businesses to the New Orleans area this year. Isis Capital Management LLC, a Connecticut investment firm that in its simplest description buys and restructures ailing software companies, is relocating its headquarters to New Orleans next month and bringing with it two small software companies it recently purchased and intends to rehabilitate.
"I'm from Louisiana, so it's a nice story of a Louisiana guy returning home," said Rodney Bienvenu, Isis' managing partner. "But I'm doing it, honestly, because it makes the most economic sense for what we do. For us, it's a low-cost place to do business and on top of that we get incentives."
Bienvenu decided to move his 10-year-old company to New Orleans after learning about the state's digital media and software incentive program, which provides tax credits on payroll and other expenditures to software firms.
Bienvenu said it was impossible to pass up Louisiana after discovering the tax credit program's effect on his company's bottom line. The state has hoped to use the credits to poach business from other states and encourage start-ups to locate here.
'Idea makes a lot of sense'
Although the program was not intended, specifically, to attract companies like Isis that restructure small software companies, Stephen Moret, the state's economic development secretary, believes the business model has promise here.
"I think his idea makes a lot of sense," said Moret, who met recently with Bienvenu. "I'm surprised this hasn't happened faster. I think the idea that he has is very compelling and we're certainly excited about the possibilities."
Bienvenu has a more than two decades-long career of creating, purchasing and selling software-related companies. He founded Isis in 2002.
"My first deal, we did a full-on hostile takeover of a public company," Bienvenu said.
Since then, however, the deals have been a bit more amicable. Bienvenu's team initially targets private equity firms that are looking to shed companies that are either declining in revenue or have flat growth. Bienvenu said he seeks out companies with less than $20 million in revenue and that generate at least 50 percent of their revenue from "maintenance" fees, a recurring cost that a client pays to the software firm for use of its services. Many of the companies provide software for tasks like payroll management.
For Isis to find the company attractive, it doesn't need to have high growth potential, just a steady customer base that consistently ponies up the maintenance charge.
One-third of employees fired
After Isis buys a company, the firm is relocated to Boston or San Francisco, technology hubs with easy access to financial capital and talent.
"We've been running this model for years," Bienvenu said. "When we buy those companies, the first thing we do is change the philosophy of the company. They before had to grow to be valuable. We say, instead, you have to make profit to be valuable."
That philosophy, however, means that Isis ends up firing as many as one-third of the employees of the companies it takes over.
"Anybody whose job it is to grow business" is fired, Bienvenu said. The same goes for people whose job it is to make new software or improve on the software systems. "The focus is on keeping existing customers happy. We cut a lot of people out of these transactions on day one."
The result is a company that produces a 22 percent margin on earnings before interest, depreciation and taxes, Bienvenu said of Isis.
"It's not sexy, but it works," Bienvenu said. "If you can drive your costs below the maintenance fee, you will make money."
After nine months of profitability, Isis begins shopping again, this time for a firm to balance the first acquisition, called the "foundation company." The second company, a "catalyst company" is the foundation company's opposite. It is a more risky venture, a company backed by venture capital and with high growth potential but struggling to find customers.
"In the market, the catalyst wants to destroy the foundation company," Bienvenu said.
Marrying the catalyst
But his goal is to marry them.
If all goes according to plan, the catalyst company will provide some high technology software to improve the foundation company's offerings and that can be sold to its customers at a higher price.
Each company remains a standalone business, but Isis generally takes 100 percent ownership in both.
It doesn't always work out.
"The hardest and most challenging part of our model is finding the catalyst company that fits with the foundation company," Bienvenu said. "If we've made mistakes, and we have, that's where it's been."
Sometimes the catalyst company has to be shut down and a loss absorbed.
Isis has purchased 12 companies since 2005.
Instead of Boston and San Francisco, Isis is moving its latest two acquisitions -- as well as its own office -- to New Orleans. Bienvenu said he was attracted to Louisiana because of the state's tax credit program for digital media companies.
The state's digital media and software incentive program provides a tax credit of 25 percent of qualified digital interactive media expenditures made in Louisiana and a 35 percent tax credit for payroll expenditures for Louisiana residents to firms in those industries.
"When the state started showing me what it was doing and I started running numbers, it was shocking," said Bienvenu.
The move will result in a significant reduction in cost for the firm, which spends 82 percent of its revenue on personnel and facilities, Bienvenu said.
Other states can't match La.
Bienvenu said he took Louisiana's offer to Florida, Texas, Alabama, Massachusetts, California and his current home in Connecticut to see if any of the states could match it. When they could not, he decided to move the business to Louisiana.
"I said to the states, give me your best deal if you want me here and none of them came close to putting together what Louisiana could put together," Bienvenu said.
Isis is moving Massachusetts companies Process Software, the foundation company, and alqeumyiQ Demand Data Analytics, its catalyst, to New Orleans early this month.
As part of the move, Isis will also launch the Louisiana Buyout Fund this month. The fund is a Louisiana company that Bienvenu hopes to grow to $25 million by the end of the year with investments from individuals around the state. Isis has put up the first $7 million and the fund has generated investment of about $5,000 from private investors so far.
The money will be used to purchase software companies that would then be moved to Louisiana.
Frank Pellerin, a Lafayette-based insurance company executive, is one of the first investors.
"I'm not a software guru, but I do know a lot about business and the economy," Pellerin said. "I thought this was a great idea for the state of Louisiana."
Although Isis has only announced plans to move companies to New Orleans, Pellerin said he believes the program will have "some residual benefit down the road" for cities throughout the state.
Bienvenu plans to close access to the fund at the end of the year and provide a return to investors in the form of dividends in four to five years. They would retain an ownership in the companies the fund purchases.
Bienvenu said he currently has interest in purchasing four companies next year if enough money is generated before then. The companies, two in New York and one each in Washington, D.C., and Indiana, together employ about 130 people and have more than $16 million in revenue.
"If we were able to get all these deals done and get them all we'd move 100 to 110 jobs to the New Orleans area," Bienvenu said. "Then those foundation companies would buy catalyst companies."
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