BOTCHED US$16M DEAL WITH IFC LED TO AFRICA ONLINE PURGE

Mergers, Acquisitions and Financial Results

According to Kenya’s Daily Nation the corporate sackings that saw six top managers depart Africa Online last week have been linked to a botched investment deal at its owner, African Lakes Corporation, and fundamental differences over the firm’s strategic direction.

Sources told BusinessWeek that the $16 million deal "which was to see the International Finance Corporation (IFC) and the AIG Africa Infrastructure Fund take a significant equity stake in the business" collapsed on the table at the eleventh hour, depriving the London firm of a much-needed source of cash to bolster its flagging operations.

The collapse of the deal with the World Bank’s private sector lending arm was said to have triggered the desperate retrenchment of Africa Online’s top management, as it became apparent there was urgent need to rationalise its cash-flow in the face of an ever-rising cost base.

The lay-offs coincide with a dreary run on the Nairobi Stock Exchange, where the firm has seen some 87.9 per cent of its market capitalisation value wiped off since it debuted, from Sh12.6 billion to just Sh1.5 billion last week.

The group communications manager, Gunnar Hillgartner, told BusinessWeek that the unprecedented sackings would save the firm about Sh55 million annually and were necessitated by a depressed technology sector. "There was a need to rationalise and reduce costs without affecting operations. In such a challenging investment climate, it was difficult to maintain a high central cost structure," he said.

A statement put out by Africa Lakes on November 8 confirmed the collapse of the IFC talks, and added that the firm was finalising short-term facilities to finance operations.

While details of the still-born IFC equity deal are still scanty, sources intimated that the Bretton Woods financiers walked out after their proposal to have the firm’s head office moved from London to Nairobi was flatly rejected by the firm’s board.

The IFC logic went something like this: Since all of the firm’s subsidiaries were operating in Africa, it was natural and cheaper to have its head office there than maintain two expensive "bureaucracies" in Nairobi and London.

But the immediate cause of the fallout was irreconcilable differences between the Africa Online’s management and the parent firm’s board on the subsidiary’s strategic direction.

The former were opposed to a move to deploy what they perceived to be a costly satellite link solution run by one of African Lakes subsidiaries instead of buying bandwidth from existing fibre optic links on the continent.

There was also bad blood between Africa Online management and London over what was seen as an ill-conceived expansionist binge into such areas as portals, media e-commerce and marketing that they felt was unnecessary and expensive as it was diverting attention from the core business of providing Internet access.

"We felt we were being led to ruin by people who, apart from providing the capital, did not have any institutional memory in running a technology business. And the tragedy is that despite our record of profitability, their obsession with "experiments" was proving to be a drain on the very viability of the business," said one of the affected managers.

In a purge that has shocked the Internet industry in Kenya, CEO Kamande Muiruri was shown the door, together withJames Ochola (general manager-Kenya).The two were among the founding members of the celebrated Kenyan ISP start-up, together with former chairman Ayisi Makatiani, who resigned in October to concentrate on Gallium, a private venture capital fund. Mike Ralston (vice president, group business development) and Ben Parker, editor-in-chief of the AfricaOnline.com website, were also reported to have left.

Clearly, the development mirrors a discernible shift of power and management responsibility for Africa Online’s operations which seems to have been accelerated by the recent resignation of Mr Makatiani.

Hitherto, Africa Online’s satellite offices in other African states reported to the Nairobi office under Mr Muiruri, which was seen as the hub of African Lakes’ ISP and data network division.

In the new scheme of things authored by London, it would appear that Mr Muiruri’s former position has been downgraded, re-branded managing director and handed to Fred Murunga.

http://www.nationaudio.com/News/DailyNation/Supplements/bw/current/story031=