Tech Industry

New Cambridge incubator program has risks, rewards

Cambridge Technology's plan to nurture start-up companies is an attempt to address Wall Street's apathy toward the company and a high rate of employee turnover.

Cambridge Technology Partners' new plan to incubate start-ups for a piece of their public offerings sent the company's shares soaring today and fueled speculation that the move could help boost morale at the company.

Cambridge shares, which have been trading well below their 52-week high of 32.25, jumped 33 percent to close at 23.13.

Cambridge works with clients to design, develop and install client-server and Internet applications. Cambridge posted 1998 revenues of $612 million and has more than 4,500 employees in 55 offices.

The plan to nurture start-up companies--some of which will be housed in the company's Cambridge, Mass.-based offices--comes amid Cambridge's recent efforts to address Wall Street's apathy toward the company, a plunge in profitability and an employee turnover rate of 20 percent.

With the announcement, Cambridge also joins the ranks of services and consulting firms that are investing in start-up companies--a growing list that includes Scient, Andersen Consulting, Diamond Technology Partners and KPMG.

In Cambridge's case, however, the company is emphasizing the goal of retaining employees.

"This is our solution for keeping employees," said Tim Mead, vice president of marketing for Cambridge. "We can't ignore the Internet economy that's being fueled around us."

In addition to helping retain employees, the plan also should help Cambridge's clients.

"We've been approached by numerous prospects and clients about creating new companies with them, but we haven't had the capacity to address [that need]," Mead said.

Under the program, dubbed NEWCO, Cambridge will fund selected start-ups. As the young companies enter the IPO stage, Mead said 20 percent of any appreciation on the company's investment will be returned to Cambridge employees.

Myrna Laine, an analyst at Adams Harkness, which downgraded its rating on Cambridge's stock in October to a "hold," said she has questions about the incubator program--particularly regarding the hosting of start-ups within Cambridge. She argued that it's probably smarter to make minority investments and allow them to function independently.

"There's a lot of potential [with the plan]," she said. "I can't say my stance on the stock is changing. I still need to see more evidence of progress."

Additionally, she said she was concerned about the progress of Cambridge's reorganization. Cambridge's plans include retraining employees, upgrading its internal computer systems and changing the way its employees work by moving them into groups focused on vertical markets instead of geographic locations.

While Wall Street responded favorably to today's news, Credit Suisse First Boston analyst Mark Wolfenberger said the NEWCO program has a potential down side: That Cambridge employees could flee to the start-ups they are assigned to work with on projects.

"Cambridge is losing a lot of people and customer satisfaction," said Wolfenberger. "The incubator [program] ultimately will suck more talent out of the company."

Nonetheless, Stan Lepeak, an analyst for Meta Group, said Cambridge is wise to start its new program to boost employee and shareholder morale.

"This is particularly important for Cambridge, especially since their stock's been in the toilet," said Lepeak. Over the past several months, Cambridge stock has slowly climbed out of a 52-week low of about 10 a share. "This [move] also shows some nimbleness in creativity on their part, which they've been lacking for the past year or so," Lepeak added.

Many start-up services companies are launching similar programs that enable the company and individual employees to invest, Lepeak noted. Scient, for example, launched the Scient Capital plan in October. Although it is not an incubator program, it enables Scient to invest in its start-up clients.

Randy Mehl, a financial analyst at Robert W. Baird, said he believes Cambridge is on the comeback trail, thanks to new direction under CEO Jack Messman and a focus on e-commerce projects. But with the incubator program comes some risk, he said.

"The down side is if the dot-com market softens and the valuations need to be adjusted," he said, "they'll have to take a write-off for it."

While Cambridge's stock has been depressed, some analysts say it's unlikely that the company will be acquired any time soon, speculating that talks with any potential suitors have broken down.

Mehl said he believes there's been a "psychology change within the company."

"I think things are turning for the positive there," he said.