Allan Martinson CEO MicroLink

1. Pan-Baltic IT companies: the pain and joy of building an international IT groupInfoBalt Investor’s League ConferenceVilnius, Oct 22, 2002 Allan Martinson CEO MicroLink

2. MicroLink’ summary • The largest Baltic IT group • 60 m EUR in annual sales, 630 employees • 5 divisions, 3 countries • Business interests in • System integration, software development, enterprise applications, training (ML Systems) • Outsourced central systems and corporate data communications (ML Data) • PC assembly and service (ML Computers and ServIT) • New media (Delfi) • Microwave radiolinks (SAF Tehnika)

3. MicroLink’s expansion story • 1991: Foundation of MicroLink • 1998: Sale of ML to CHS, creation of new ML • 1998: Merger with Astrodata • 1999: Acquisition of Parks, LvNet, Taide, SK, I-Net, VAR • 1999: Launch of Delfi portal • 2000: Merger with Fortech, ICS • 1999-2002: Sale of ML Elektroonika, Linki, Kungla Dialoog, Columbus IT Partner, Taig, CHS Service, ADML, e-commerce ventures, e-consultancy, closure of retail outlets • 2000-2002: restructuring • >20 m EUR invested in 4 years • 4 private equity placements, multiple bond issues

4. MicroLink in figures 1998-2002

5. Changes in business and culture • Software, services and R&D (radiolinks): from 8% in FY98 to 40% in FY02 • Sales by geography: • FY98: 100% Estonia • FY02: 48% Estonia, 45% Latvia, 7% Lithuania • Employees by country: • FY98: 99% Estonia • FY02: 40% Estonia, 50% Latvia, 10% Lithuania • Share of employees who are with ML from 1998: 6% • Original founders stake down from 100% to 15% • But basic DNA is still the same

6. MicroLink’s slogans and strategies 1998-2002 • 1998/99: Within 3 years to establish itself in all 3 Baltic countries as leader in most IT markets (understood as PC & retailing & datacom). To invest 10 m EUR in 1-2 years • 1999/00: Quick and dirty. Just do it. Doing right things is more important than doing things right. • 2000/01: Streamline and simplify the group to become able to manage so many businesses in so many companies in so many markets • 2001/02: Sales, sales, sales & cost control • 2002/03: We are strong, established, profitable professional services and solutions company for large and medium accounts

7. Why did MicroLink expand? • Rational explanation: • IT companies have high and growing cost base • Personnel costs form 2/3 of the cost base and are growing • Revenue base on small markets is volatile • High uncertainty does not support dangerously growing cost base and investments into future • Necessity to lower risks by getting access to wider markets with less volatility • Have lunch or be lunch: there is no escape in the long run • Cultural explanation: • Aggressiveness, internationalism, enterpreneurship and curiousity are parts of MicroLink’s DNA

8. Was it worth it? • The fundamental question: did expansion add value for MicroLink and its clients? • The answer is definite YES • However, the first sources of added value were not where we initially expected them to be • We expected the main benefits to be in higher efficiency and cross-border transfer of professional IT competences • Instead, we benefitted from transfer of values, managerial competences and innovation

9. Role of corporate values is often underestimated • Initially, we thought we can buy skills and teach them values • Now we know we can buy values and teach them skills • All acquisitions which turned problematic were with companies which carried different value sets • All acquisitions which shared similar values were able to learn and turn the businesses around… and around • In international expansion, you cannot buy market shares or businesses. You must buy right people: they will do the rest. • But before you find people similar to you you must very well know who you actually are • Mergers brought MicroLink (one of) the best management teams in Baltic IT industry

10. But consolidation also brings tangible benefits • Lower costs through consolidation (cheaper financing, leasing, office space etc) • Pan-Baltic vendor relationship (Sun, HP, Dell, SAP etc) • Cross-border projects (some 20 Baltic projects fulfilled after mergers: Tallinn, Riga stock exchanges, Est/Lat finance ministries etc) • Possibility to serve pan-Baltic service clients (Coca-Cola, Statoil, Kesko etc) • Stronger managerial leverage (good managers get wider responsibilities) • Better visibility for investors and creditors • ML only starts to reap merger benefits

11. Do-nots of the expansion • Never expand internationally • If internationalism is not part of your DNA • If your home is in disorder • Unless you have excess managerial power • Unless you are able to agree on simple rules and trust your new colleagues • Unless you are sure you have enough money to survive through crisis • It is always harder, costlier, slower than you ever think

12. Why consolidation will continue • Personnel costs (incl salaries, taxes, training, HRM) grow faster than local IT markets • Average labor cost in Baltic IT companies 1200 EUR/employee/month, added value 2500 EUR/m • In CEE: LC 2000 EUR, added value 3500 EUR • In Scandinavia LC 5000 EUR, added value 9000 EUR • Competition increases with pan-Baltic integration and EU accession • Required competences become more deep and diverse • Obvious answer: Further consolidation and specialization of Baltic IT industry

14. Thank You! Ačiū! Paldies! Aitäh!