Interview with Thomas B. Moran, President and CEO of Mastech

Mariusz Skonieczny, Classic Value Investors: Before joining Mastech, you had 20 years of experience in the staffing industry. Tell us about some of your accomplishments from the time when you were with Frontenac Company, Hudson Highland Group, Americas, and Robert Half International.

Thomas Moran, Mastech: Being able to grow revenue and gross margin within the industry.  In economic downturns being financially responsible to guide organizations through three different recessions.  This is done by attracting quality leaders and talent within the industry, hold these individuals accountable to metric expectations and reward for their success and the success of the organization.

Mariusz Skonieczny, Classic Value Investors: Name a company that you respect and admire and describe why?

Thomas Moran, Mastech: Robert Half International.  They have built a quality brand name through strong policies and procedures, quality people, and continue to focus on margin protection.  RHI focuses on long-term value creation and strong market capitalization.

Mariusz Skonieczny, Classic Value Investors: Before you joined Mastech, you served as “CEO Partner” for Frontenac Company, Inc., a private equity firm that tried to acquire Mastech before it was spun off from iGate. What drew your interest to Mastech in the first place?

Thomas Moran, Mastech: As you know, Frontenac and I were introduced to Mastech because we tried to acquire them.  Through that due diligence, I liked the business and knew what was needed to turn the business around.  I also felt comfortable with the two principals and their desire to transform the Company into one that can achieve long term superior growth compared to its industry peers.  They recognized the challenges that Mastech had it getting to that position (cultural issues; limited service offerings; etc.) and were realistic in their expectation on the length of transition and the need for investment. I also liked the clean balance sheet that the company has and the ability to access capital to make the required investments to accomplish our mission.

Mariusz Skonieczny, Classic Value Investors: What price was Frontenac Company willing to pay for Mastech before the spin-off?

Thomas Moran, Mastech: I don’t feel comfortable answering that question.  However, I can tell you that from a “multiple of earnings”, it was lower than today’s multiples.  Rightfully so given that the business had been declining for two straight years as well as the state of the economy back then. If you look at the enterprise value of Mastech today, the owners should have taken the Frontenac offer.  My job is to make the Frontenac offer look “dirt-cheap” as we revisit these discussions 12 to 18 months from now!

Mariusz Skonieczny, Classic Value Investors: Why didn’t the deal go through?

Thomas Moran, Mastech: Differences on Value between the two parties.

Mariusz Skonieczny, Classic Value Investors: From what I remember, you told me that you were not interested in running Mastech when Sunil Wadhwani, Mastech’s founder, first approached you about it. What made you change your mind?

Thomas Moran, Mastech: I liked the public play.  I liked Sunil’s hands-off approach.  He assured me and I developed more of a comfort level that I will have complete control running the business.  More importantly, I believe the business has a lot of future!

Mariusz Skonieczny, Classic Value Investors: How has Mastech changed in the time that you have served as CEO? In 2008, 66 percent of total revenues were generated from the top ten clients. What is this number today?

Thomas Moran, Mastech: 53% in first quarter 2010.  The client concentration has improved, but the most powerful change I believe is the Culture.  The organization is starting to believe that it can be successful.  The senior management team, which has been somewhat revamped since my appointment, is working better as a team, searching for improvements and solutions rather than pointing fingers.  Client care and Candidate care are being attended to, not merely talked about.  We are becoming a sales-driven organization.  There’s much more accountability towards success within the organization now and the best part is, our employees are now starting to have fun.

Mariusz Skonieczny, Classic Value Investors: What else are you doing to make the company better in terms of operations?

Thomas Moran, Mastech: Getting closer to our staff as well as client base for better understanding and anticipating their needs. Towards that end, we are investing in our Branch network (geographic expansion and talent upgrades); accountability and performance metric, sales/business reviews.  Explicitly defining expectations and holding our employees accountable for achieving these expectations.  Upgrading and expanding our recruitment talent, both at our offshore global recruitment centers as well as in our domestic recruiting organization.

Mariusz Skonieczny, Classic Value Investors: According to your employment agreement, you will be paid $25,000 for every acquisition you make. This kind of arrangement makes some investors nervous because they are afraid that you will go on a shopping spree and make bad deals just to pocket the money. What is your response to this?

Thomas Moran, Mastech: This clause was largely meant as a short-term understanding between myself and our Board to motivate me to treat acquisition activity as a major component of my overall strategy for the Company.  While a portion of my 2010 variable compensation is tied to acquisition successes, I don’t expect an increase in base compensation upon the completion of each acquisition that we do. As far as the shopping spree theory goes, we have walked away from a dozen or so targets due to valuation issues, strategic fit concerns, and /or issues that popped-up in preliminary due diligence efforts.  As I tell my “sometimes frustrated CFO” every time we walk from a deal, we build a confidence level and trust factor with the Board and our shareholders.  The Board clearly knows my objectives are long-term in nature!

Mariusz Skonieczny, Classic Value Investors: Most of your focus right now is on making acquisitions to strengthen the company, but because Mastech’s stock appears to be so extremely cheap, would you consider buying back stock? I doubt that you can acquire other companies as cheap as what Mastech is selling for on the public market. Wouldn’t a share buyback benefit shareholders more than acquisitions would?

Thomas Moran, Mastech: I can’t argue that it’s a compelling value prop.  However, there are a number of factors that give us pause: 1) MHH’s public float (share owned by non-insiders)  is not very large and a buyback would worsen that situation and could cause some Exchange Listing issues; 2) While we have a clean balance sheet and access to financial resources, we do have financial constraints / limitation. 3) Our acquisition strategy is “buy and build”, the opportunity for future growth and value creation by doing the right acquisition can quickly surpass the “static” value creation of a buyback.  It’s a longer-term value creation approach but that’s one of the reasons I signed on with Mastech.

Mariusz Skonieczny, Classic Value Investors: Running a company is one skill, but allocating capital is another. What is your philosophy on capital allocation?

Thomas Moran, Mastech: Our strategy is to be a premier supplier of staffing services in the IT and Specialized Healthcare space.  Those are the only two areas we are focusing acquisitions on.  As far as capital allocation is concerned, initial valuation is important to us, but finding a company that enhances our overall business model / value prop to our clients goes to the top of my list.   When we find a situation where 1 + 1 = 3, we will pull the trigger.

Mariusz Skonieczny, Classic Value Investors: You mentioned before that you believe that Mastech’s stock is undervalued. What is the value or range of values that you think Mastech is worth? What metrics do you use to value Mastech?

Thomas Moran, Mastech: My personal belief is that our stock is undervalued to Mastech’s potential.  Ask 10 CEO’s that question and 10 CEO’s will say that their stock is undervalued.  However, I will let the investment community make that determination today and as we implement our growth strategy for the future. I know my vision for the company three-years out; I’m excited about what the valuation of MHH could look like.

Mariusz Skonieczny, Classic Value Investors: On April 16, 2010, the Wall Street Journal ran an article, “The Sector in Hiring Drive,” that stated that the technology industry is experiencing an accelerated recovery and that tech companies are ramping up their hiring. Are you actually seeing this kind of increase in demand from your clients?

Thomas Moran, Mastech: We are seeing a pick-up in demand in most channels in our IT business.  Healthcare is still slowly recovering but given the demographics of the U.S. population we are confident in a long-cycle recovery in the not so distant future.

Mariusz Skonieczny, Classic Value Investors: You recently made an acquisition. You paid $1.3 million for $6.5 million of annual revenues. This seems like a good deal. The problem is that the new acquisition does not add anything to the bottom line. What kind of synergies and cost reductions are you anticipating?

Thomas Moran, Mastech: Curastat is a small healthcare staffing company that has good leadership and brand recognition in the southwest part of the country.  Like most healthcare staffing organizations, the last few years have been tough.  However, we bought Curastat because we saw an opportunity to get a footprint in the healthcare space, which is largely in a “stabilization period” or in the first stage of market recovery.  That coupled with a strong management team, (that I know personally from my days at Hudson); and an attractive price.  I expect Curastat to be accretive to earnings during 2010, it just didn’t happen in the first quarter.  I also want to stress that, in addition to the Curastat acquisition, we have made additional investments in SG&A (Tim Bosse & team) to pursue other healthcare related initiatives.  This investment will have a little longer payback cycle and will take a little time before we see a net gain to earnings.

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