Power to the Students

Anyone who doubted that Power has shifted to "the People", and to Facebook in particular, should look no further than the report today that HSBC has "been forced into a humiliating U-turn over overdraft charges for graduates after an online campaign orchestrated by students using the social networking site Facebook". (The words are from The Times this morning)

I won't go into the ins and outs of the case, but the massed ranks of graduates who expressed their feelings in no uncertain terms on Facebook - and threatened to boycott the bank - clearly won the day. At the moment Facebook is the the chosen site for graduates (Myspace and Bebo have a less well educated and/or younger following). What HSBC feels today, most others will feel tomorrow. It won't just be campaigns. It will be recommendations - good and bad. Reputations will be made and lost on Facebook.

That's why the current moves by some employers to "Ban Facebook" is not only ill-considered but impossible anyway. If you are recruiting anybody sub 30 today, they will look you up on Facebook and see what your current employees feel about working for you. Indeed, they will want to interface with them too.

That's why you should Embrace social networking and start using it to your advantage. Resistance is futile.

Morons and Youtube - Aug 07

Today Youtube has sealed a deal in the UK to pay royalties for the millions of pieces of music used on Youtube videos. Youtube is finally legit.

A year back, before Google offered $1.65b for Youtube, all the talk was about Youtube being sued for its life. A "litigation-laden landmine". Indeed, this was the view of my collegues at Ovum. I took a completely different view which did not get too much backing at the time. I reproduce below one of my musings on the subject in Hotnews a year back. I must admit I'm rather pleased with my "Talk of suing either your customers or one of the best marketing channels around is so 'yesterday'" phrase!

Rereading it, I am also pleasantly surprised that I was making predictions about how social networking sites - indeed I even mentioned Facebook! - would become all prevailing.

Any of you attending my ICT Leaders speech atop BT Tower on 4th Sept will be reminded of this as it's the main part of my 'Power to the People' speech.

Morons and Youtube - Sept 06

Holway writing on Hotnews
29th Sept 06

"Only a moron would buy Youtube"

Reuters yesterday quoted billionaire tech investor Mark Cuban as saying that only a 'moron' would buy Youtube. He reckons Youtube will get 'sued to oblivion' because of copyright violations.

Comment: I wrote last week on the phenomenal rise in the popularity of social networking sites, such as Myspace, Youtube and Facebook, and the associated eye-watering valuations such sites now attracted. Although Mark Cuban's comments are both interesting and thought provoking, they might be based upon experience gained during a different, quieter, slower age.There was a time, just a few years ago, when TMT companies might be able to justify 'defensive' market strategies. When the pace of change and disruption was 'relatively' slow, defending your current modus operandi against 'the new' could buy you a number of years to milk the cash cow. If TMT companies do that now they risk the fate that befell Kodak - except it will happen considerably faster. The initial reaction of the record companies to file sharing (also initially illegal) was totally defensive - now digital downloads are mainstream. Exactly the same will happen (actually has already happened) to social networking. Copyright holders have far more to gain from embracing Youtube than in fighting it in the courts.

A few weeks back Robbie Williams appeared at Knebworth. Tickets cost up to £180 each. That £180 would buy every CD that Robbie has ever issued. He could have said 'Pay me £180 to come to my concert, and I'll give you all my music as a memento.' In other words, these groups now make all their money from concerts, TV appearances and merchandising. The music itself is a marketing tool to get that revenue - NOT the core revenue earning that it used to be. That is how the metrics have changed.Williams, like so many other old and new rock bands, has embraced the changes which have taken place in the metrics of making money in the new networked world.

Talk of suing either your customers or one of the best marketing channels around is so 'yesterday'.

IBA finally wins Isoft?

Yesterday CompuGroup withdrew its bid for Isoft meaning that the 69p bid from Ozzie IBA can be recommended by the Isoft board at tomorrow's EGM. I could have written my own critique of this but my ex-colleague Tola Sargeant wrote it for me on the Holway@Ovum Hotnews service yesterday. Indeed Tola (who I would guess is now the UK's leading expert on the NHS IT project) was widely quoted for the views expressed.

Holway@Ovum Hotnews
11:00 IBA set to win bidding war for iSoft
Tola Sargeant

Australian healthcare application company IBA Health looks set to win the bidding war for iSoft after German rival CompuGroup said today that it would not be increasing its cash offer for the company of 66 pence per share. However, CompuGroup has reserved the right to increase its offer if a third party (other than IBA) announces a competing offer for the beleaguered UK software provider.

CompuGroup's Chairman Frank Gotthardt said: 'iSoft would have been an excellent complement to our international business activities, but CompuGroup does not intend to enter into a contest that would lead to prices and risks that are unreasonable'.
In response, iSoft said in a statement that IBA's cash offer represents superior value for shareholders and that it has therefore withdrawn its recommendation of the CompuGroup offer. It now intends to recommend the IBA cash offer and proceed with the steps necessary to implement it by way of a scheme of arrangement.

The news follows iSoft's announcement last week that it was planning to hold an auction for the company had the 'competitive situation' continued to exist between IBA and CompuGroup. IBA increased its offer for iSoft to 69 pence per share (or 1.65 new IBA shares) last week after an Australian private equity firm, Allco Equity Partners, agreed to invest up to £122m in IBA should the deal go ahead. IBA has already acquired a 25.6% stake in iSoft from existing shareholders.

Comment: After the distraction of a bid from CompuGroup and the promised spectacle of an auction for iSoft, we are almost back to where we started. Today, IBA once again looks set to be the new home of iSoft. But now it will be paying 69 pence per share in cash rather than its original all-share bid of 1.1 IBA shares for each iSoft share, which valued iSoft at 54.7 pence per share. While that is good news for iSoft shareholders, it is not quite as good news as the auction that had been proposed, which led iSoft's shares to climb to a 12-month high of 73 pence yesterday. This morning iSoft's shares are, unsurprisingly, back to 69 pence.

New Chairman at LogicaCMG

LogicaCMG has announced that David Tyler is to replace Cor Stutterheim as Chairman at LogicaCMG. Tyler only joined as an NED in July. He was FD at GUS. The move was widely expected and is being regarded as evidence of a fresh start at LogicaCMG.

However, today's interim results statement makes no new reference to any progress in the all important search for a new CEO.

I won't comment too much on the results themselves as they were widely anticipated and will be covered by others. It was the UK "whot done for them" with revenues down 8.3% at £334.2m and operating profit margin down from 9.1% to just 1.3% - not helped by a £13m write off for a project over run. LogicaCMG was slow to the offshoring table - they still have only 6900 of their 38496 people offshore. Competition from the Indian players in the UK space is cited as one of the reasons for the UK poor performance.

But as usual LogicaCMG is a 'curate's egg' ie it is actually quite good in parts! Netherlands, France, Germany and Outsourcing saw decent 'above market growth' performances.

As I have said many times "If only it could get all its cylinders firing at the same time" LogicaCMG could be a really great company. Problem is that it hasn't happened in my lifetime yet...and I'm getting older by the day. With the 'old guard' moving on and out, I do have increasing doubts that LogicaCMG will ever make it on its own. Which is...sad.

Quote of the Day

Just been listening to the 8.10am interview on the Today programme on Radio 4 Click here to Listen Again . John Humphreys was interviewing Vint Cerf - one of the veterans of the internet and now an "evangelist" at Google.

In my view Humphreys rather wasted the interview. Rather than getting Cerf's views on where the internet was heading, we had the same old rerun of the"there is some awful stuff on the internet which therefore makes it a 'bad thing' and it should therefore it should be censored" argument. The same, of course, could be applied to everything from the invention of the printing press to cinema and DVDs.

I thought Cerf's rebuttal of all that Humpheys threw at him was admirable. I particularly liked Cerf's quote "It you see something wrong in the mirror, you don't go fix the mirror". Good one!

Internet access continues to gain ground

Lovers of free research are having a field day. Hot on the heels of the excellent Ofcom annual report last week, today, the ONS issued its annual report on Internet access. You can download the full report for free (well, as taxpayers, I guess we have paid for it already) Click here.
Another 1m households in Great Britain now have internet access. At 15m households that's 61% of all households. 84% of thses were broadband connections.

It was the demographics that really interested me. Access to the internet "at least once in the last 3 months" by age group was as follows:

• 16-24 90%
• 25-44 80%
• 45-54 75%
• 55-64 59%
• 65+ 24%

On the surface, there really is a dramatic decline in internet use post 65. But the usage by the over 65s has increased from 15% to 24% in the last year making it the biggest % increase of any age group. Those that do use the internet, use it extensively - 46% of over 65 year old regular internet users, check in every day. It's all about a generation which has been used to using computers - at work and at home - moving towards retirement. If you have never used a PC in ernest you are much less likely to take to it in your old age. Conversely if you are completely computer literate, you will possibly use it even more in your retirement. As I have said before, I see the "Silver Surfers", or the 55+ age group, as being the single biggest growth group for internet usage in the period ahead. I also see social networking being of particular relevance to them. I just wish someone would take note!

This age group is already the largest users of News and Finance sites.

The break up of LogicaCMG...

The FT today Click here chronicles the long protracted search for a new CEO at LogicaCMG and speculates on the increasing risk that the delay creates to LogicaCMG's future as an independent company.

Firstly, the time that Zygos (the headhunters) seem to have taken to get on with this process since Martin Read announced his departure, seems excessive. This has created all kinds of internal tensions which we have written about before. Not least the appointment of Jim McKenna as acting CEO and the departure of fellow director Didier Hermann as he couldn't work with McKenna. I have long favoured the appointment of an external candidate but the prolonged time to find one merely means that there could be further unrest when he is appointed.

However, all the talk "on the street" in the last period has been about the increased vulnerability of LogicaCMG to a bid during this period of increased uncertainty. LogicaCMG is the "last remaining prize" amongst UK-owned IT services companies. It is the only one of any size left. Even its smaller rival, Xansa, has now been snapped up (at an attractive price too) by French Steria.

LogicaCMG has many attractions. A high reputation for its project management capabilities on complex projects. A strong UK presence plus good spread throughout Europe. A bit slow to the off-shoring table but that could add to its attractions to some bidders keen to apply the 'blended' model. At a P/E of c12, it's also below the market average due to its recent lack-lustre performance. A bid could come from both trade buyers and PE. Indeed, this would be a reasonably small (and therefore do-able) deal for most PE firms even in the current climate. LogicaCMG has a current market cap of £2.4b. A breakup would be the favoured route and could be the end result of either a trade purchase (buy it all and sell the bits you don't want) or PE (repackage, revamp and sell or float the various parts)

LogicaCMG has for so long been the main (only) torch bearer for the UK-owned IT services sector. It is 'regrettable' that it could all end as a result of a botched succession handover process

"Time is ripe" for Tech IPOs?

An article in the FT today Click here suggests that, after several years of famine, the UK is "ripe" for an upsurge of tech IPOs. The evidence for this is, apparently, the success of recent US tech IPOs like VMware, Limelight Networks and Data Domain.

What we have actually seen in the UK of late, of course, is a reduction in the number of quoted tech companies as so many of the mid-sized players have fallen to a combination of trade and PE-backed bids. Indeed the 'public-to-private' trend has been the most pronounced feature of the market in the last 5 years. If the FT prediction was to 'come-to-pass' it would be most likely the shortage of funds for PE-backed deals that would be the reason. Strangely this is not mentioned in the FT article!

But, to be honest, I think all this talk of an up-tick is wishful thinking. I think valuations, PE-backed deals and tech M&A have all peaked. IPOs have happened in good and bad times and I think that sound tech IPOs will always find backers. Indeed, Milan Radia (a well respected analyst known to many readers) suggests in the FT article that "investor appetite will probably remain strong for companies with larger liquidity, longer, more established track records and good business visibility". That is hardly new Milan!

Additionally those IPOs in in-fashion sectors - Web 2.0/social networking/the 'Me-Web' - will also find their groupies.

Jon Moulton warns of 'grim times'

Most readers will know Jon Moulton of Alchemy. Indeed, I've had a long association with him through such companies as Civica, Sanderson, Cedar (now COA) and even Phoenix IT. I've also had the pleasure of having some robust debates with Jon - both public and over a private lunch. (BTW - I think we are both booked for an appearance (again) on the panel at the end of the 2008 Regent conference on 5th Feb 08)

My respect for him is huge.

If Mr Moulton says buy out firms are in for a grim time...TAKE NOTE! But don't think you will be immune just because you don't have any involvement with buy outs. Jon warns of a 'mortgage famine' with knock on effects on house prices which will dent consumer confidence and affect economic growth. If that happens, we ALL suffer.

Alchemy head warns of grim times
By Martin Arnold in London
From FINANCIAL TIMES
Published: August 25 2007

Jon Moulton, the British private equity veteran, has warned that the buy-out industry is heading for a dramatic drop in the returns it generates for investors as the credit crunch hits the value of companies acquired at the top of the market.

The boss of Alchemy Partners, a mid-market buy-out and distressed debt investor, predicted that large private equity firms would need to write down the value of the companies they own and consider selling subsidiaries to raise cash.

The outspoken buy-out boss also forecast an increase in debt-for-equity swaps by companies acquired with high levels of debt that are unable to refinance their loans, forcing them to hand over ownership to creditors.

“There are companies out there that I would be personally willing to take 10-to-one odds on them needing debt-for-equity swaps, because they are over-levered to any reasonable base and cannot possibly be refinanced,” he told the Financial Times.

He said that “in many cases” this trend would be “precipitated if a company needs more cash”.
“The large private equity funds have been booking very large stated rates of return for a long time and they are now going to have unrealised write-downs.”

Predicting a long grim period for buy-out firms, Mr Moulton said the UK seemed on the brink of a “mortgage famine” that could erode house prices, eat into consumer confidence and hurt economic growth.

“A mortgage famine is, I think, one of the most likely events. It will have an impact on the economy. It will hit house prices, and they are such an important factor in consumer psychology that it will feed through into the economy.”

Mr Moulton owns stakes in several mortgage and loan companies, including mortgage broker John Charcol, Swift Advances, the consumer loan and mortgage business, and Everyday Loans, the subprime lender.

Mr Moulton said his distressed debt team was “working long, hard hours”.
He said about €4bn ($5.5bn) of leveraged loans had been refinanced in the second quarter that would not have been completed in current market conditions.

“This gives you some idea of the magnitude. It doesn’t mean there is a €4bn write-off, it means that €4bn could probably be replaced with €3bn, not €4bn,” he said.

“That number will go up now every quarter, because of the growth that occurred years back in those highly leveraged loans. So it is a big market coming.”

The Financial Times Limited 2007

Isoft auction?

Further to my many earlier posts on Isoft, I note that the current tussle is quite likely to be resolved by an auction. According to the FT today, Isoft is discussing this option with the Takeover Panel.
"Uncharted water" indeed! Isoft shares are currently up to 71p - higher than the 69p cash offer from IBA. Certainly I would never have anticipated this and the "manna from heaven" gets better by the day for Isoft's shareholders.

Communications sector doesn't even match GDP growth

Re: the post below, of course, the total number of households has increased - marginally - so the revenues of the total Communications industry have increased from £47.6 billion in 2004 to £50.4b in 2006.

But, again, this is a "Classic Holway" chart. You will remember that in my 2002 Prince's Trust "IT's all over now?" speech I predicted that the whole ICT industry was unlikely to grow at anything in excess of GDP. If you take Ofcom's figures for the whole commucations sector - Radio, TV and Telecoms - and revert to real growth (ie strip out inflation) you will see that the sector hasn't even matched GDP growth in the last year.

Household spend on communications services

This chart from the Ofcom report is a classic Holway "Shape of things to come". As you can see, average spend per household on Internet & Broadband IS increasing from £9.15 pm in 2004 to £10.20 in 2006 but this, and other very marginal increases in spend on TV subscriptions and Mobile, in no way compensates for the decrease in spend on Fixed Voice from £26.16 to £22.81 in 2006. So the average spend on Communications per household has fallen from £94.24 in 2004 to £92.05 in 2006.

Ofcom's Annual Survey makes interesting reading

The media today was full of snippets from Ofcom's 4th annual report on the UK Communications Market. You can read the full 300+ report on the Ofcom site Click here . For all lovers of loads of data and charts it is an excellent read. As it is 'free' it's not bad value either!

The key headline in the press was that kids were now spending more time on the internet - on social networking sites in particular - and less time watching the TV and DVDs or playing computer games. I find that quite encouraging.

17% of all UK internet users now have a social networking profile. But the difference by age is huge. 42% of students have such a profile but only 2% amongst retired people. I am clearly in the minority here! More in my Power to the People speech.

Another headline was around females in the 18-34 year old age group (strangely called the "Digital Mums") now spending more time on line than males in that age group. Shopping and social networking were cited as the reasons. Silver surfers (which Ofcom defines as those aged 65+ - I must admit that most others define 'silver surfers' as those aged 55+) however spend more time on line each month - 42 hours - than any other group. However, only 16% of such 'silver surfers' surf at all!

The point that Ofcom doesn't make is that those currently over 65 would have been unlikely to have used the internet at work. As the years go on, far more retired people will be fully computer literate and the numbers of internet users in that category will rocket. Even now 25% of all UK internet users are over 50 and they account for 30% of all the time that Britons spend on line. A HUGE market! Particularly as they have high disposable incomes

The other point that interested me was how the real cost of a bundle of residential telcom services was falling year-after-year-after-year. I've used many charts to illustrate this "more-for-less" syndrome in other sectors of the ICT market. I shall now add this one!

I'm sure I shall add more on this extremely interesting report when I have had time to read it more thoroughly.

Isoft

I must admit that I thought the battle for Isoft was over when CompuGroup offered 66p in cash; trumping the 57p Ozzie-share deal by IBA. Clearly, CSC was much happier with the CompuGroup deal as they got their hands on the Lorenzo software they needed for the NHS IT Project. Indeed, yesterday CSC said they would NOT be making an offer themselves ahead of Isoft's AGM on 31st Aug which was expected to confirm the CompuGroup bid. Indeed, they needed resolution as their banking facilities were running out too.

Now IBA have come back with a 69p cash offer. In addition, IBA have bought 24% (the max. allowed) Isoft shares in the open market. This could well scupper the CompuGroup bid.

Followers of my blog on the Microgen/Trace bid might be feeling a strange sense of familiarity here! IBA should remember that shareholders can and do accept lower offers. The key to all of this now will be CSC. Remember they briefly blocked IBA's first bid. Methinks they would be much happier with the CompuGroup deal but IBA's Chairman, Gary Cohen, reckons that CSC's eventual agreement to IBA's first bid still stands now.

Anyway, who would have thought just a few months ago that people would be fighting so hard to acquire Isoft? A company still under investigation for its accounting methods. Beleagued shareholders must now believe there is a God in Heaven afterall.

iLike widgets?

A few months ago I started to put together my Power to the People presentation for the Prince's Trust Technology Leadership Group's ICT Dinner on 4th Sept 07. A lot of it is about Web 2.0 and the effect, for example, of social networking sites such as Facebook on corporate IT. Research for this led me into the world of Widgets.

Back in May 07 (so, so, long ago in Web 2.0 time) Facebook opened itself up to software developers who could develop simple apps - called Widgets - to 'personalise' your Facebook profile. Many thousands of these have since been developed. Using the viral marketing which makes social networking sites so powerful, you get told every time a "friend" of yours installs such a widget. Some are frivolous (like giving people flowers for their cybergardens). Others are more mainstream.

Prince's Trust TLG members will remember Ashley Highfield - New Media Director at the BBC - back in July telling us all how he had held a special Hacksville day for such developers to help him with the BBC website. He enthused about the iPlayer Widget for Facebook which allowed Facebook users to list their favourite BBC programmes with direct links to the newly launched BBC iPlayer site so they could easily click through and watch the actual programme recommended.

At that time, iLike had just been launched on Facebook. iLike had been launched at the end of last year as a standalone site. It listed concerts and told you which of your friends were attending. It also allowed you to list your favourite music for your friends to 'share'.
It took iLike six months to get 1 million users.

Then in June it launched on Facebook. They signed up 1 million...in the first week. When I started to prepare my presentation at the end of July, iLike had 4 million users and had run out of servers.

Last night I emailed iLike to get the latest figures as my presentation was due at the printers.
I was amazed that iLike now has 10 million users. This must make it the fastest growing application of all time. It took Skype 15 months to get to 10 million users. iLike have achieved that milestone in half the time.

At the risk of disobeying the Rules of How to be a Middle aged Man (see below), I rather like iLike. Knowing what your friends listen to has been eye (or is that ear?) opening. It's not just fun and very easy to use, but it links effortlessly to iTunes and Amazon so you can buy the track for your own collection. An obvious way of monetising for the widget developers.

I suspect that the twentysomething founder of iLike - Hadi Partovi - is, as I write, fending off the multi million bids for iLike. And good luck to him!

My own view is that Facebook is the first social networking site to go 'mainstream'. The first to break out of the sub-24 year old market. 41% of Facebook users are over 35. As that was a May 07 figure, I suspect it is even higher now. As social networking goes mainstream, so Widgets will become very important. Indeed, they already are in fashion, music, entertainment etc. I suspect a lot of fortunes are to be made in Widget development. I also see them crossing into mainstream IT as a very fast, easy and cost effective way of personalling even the most 'boring' corporate site.

UK SITS Top Ten show remarkable consistency

On 4th Sept, I am due to give my now annual ICT Leaders "State of the UK ICT Nation" Speech for Prince's Trust. This year it is atop BT Tower. Indeed, because BT are sponsoring the event, we will raise over £60,000 for the Trust. Almost all the "by invitation only" tickets have been sold and the guest list is its usual high standard.

My speech is called "Power to the People" and is all about how consumers and corporate users are now in the ICT driving seat. I'll post a precise of the speech here later.

However, I thought I'd better make some reference to the SITS market as I have done in every other year. Of course, this year I'm not part of the Ovum team but they readily agreed for me to make reference to their latest Market Trend research - and the 2006 UK SITS Top Ranking Players - which has just been published.

Even though EDS has 'retaken the #1 slot' from IBM this year, what struck me was how the rankings seemed to contain all the same companies. So I dug out my 1997 Holway Report and compared the 2006 list to the 1996 rankings. Indeed the Top Three are identical! Eight out of the 2006 Top Ten were also in the 1996 Top Ten. Even the newcomers Capita and BT were ranked #14 and #11 in 1996. The 'ejections' Sema (now Atos Origin) is at #12 and Oracle is at #13.

Over the years I have anticipated wide-scale consolidation amongst the Top Ten. I admit I have been wrong - so far. With the exceptions of HP+Compaq+Digital and Atos-Origin+Sema, it hasn't really happened. The top echelons of the IT services rankings are pretty much unchanged.

Indeed, even the two "consolidations" listed (HP+Compaq+Digital and Atos-Origin+Sema) are hardly great adverts for M&A. Do you remember the old joke "How to do create a medium-sized UK IT Company?". Answer "Buy a big one and wait!".

What also stricks me - indeed, it was the subject of my very first HotViews Blog back in Jan 07 - was how companies go in and out of favour...and then come back in again! As you can see from the 2006 list, EDS, Fujitsu and Capgemini have recorded double digit growth in the UK in 2006. A few years back all these companies seemed 'dead in the water'. The stars then - IBM, Accenture and CSC - are now 'suffering'. All I can predict is that you should not write any of these off! Their time will come again.

The one' bit of excitment' is the entry for the first time of an Indian player into the UK SITS Top Twenty. TCS is there at #15 and, indeed, Wipro is 'bubbling under' at #21. Both these companies did not figure anywhere in my 1996 Top Rankings.

Perhaps not quite so bad...yet

The cartoon today showing a City institution issuing trampolines to its brokers "so they could keep up with the market" is certainly close to the mark!
I thought I'd update my share performance table 'mid-month' for a change.
The YTD performance is hardly anything to cry about. Indeed NASDAQ is still showing a near 4% gain on the year and Techmark is up 5.6%. Indeed the Telco and Media sectors are all still up YTD.
Of course, they are all down from their 2007 peaks. The FTSE100 is down around 10%.
Don't get me wrong, I'm not shrugging off all this recent volatility. I'm just suggesting that we should keep it in perspective. We would have to suffer some further considerable losses for the year too be washout.

The problems and advantages of being a middle-aged man

My wife pointed out this article entitled "How to be a middle-aged man" in the FT on Saturday. To read Click here.

You see, my wife disapproves of me having a Facebook profile despite my protestations that it is 'for research purposes". Interestingly, the FT article supports the view that Facebook is for the 'younger generation' and - like 'dancing at parties' , 'wearing slippers' and 'having affairs with women young enough to be your daughter'- should be avoided by middle aged men.

Despite that, it's a fun read. It says that middle aged men can wear jeans 'because we invented them', can drive fast cars and can 'keep up with the latest sounds' purely because the young - unlike the middle aged - have 'musically truly missed the party' anyway.

Style-wise, being a middle aged man might seem difficult nowadays. But, in other respects, it seems we 'have never had it so good'. David Smith, writing in the Sunday Times today, makes the point that rises in interest rates transfers cash from those in debt (largely the young) to those with savings (largely the middle-aged and older). Indeed, us "Baby boomers" or "Golden Generation" have three quarters of the UK's £5000b of wealth. We tend to have paid off our mortgages on houses that will never ever be capable of being bought by any average younger person. We not only have savings earning ever higher interest but are the last generation to have decent pensions. On top of that we are in demand in the labour market like never before - should we wish to spend our time working.

So "rising interest rates, like rising house prices, are an inter-generational transfer from young to old".

Unfortunately, I think that is true. Unfortunately, because one cannot but feel very sorry for any young person with a family struggling with an ever increasing mortage today.

Ownership of the UK SITS sector

When Phil Codling and his team at Ovum publish this year's Market Trends this month, it will be the 20th edition of what used to be called the 'Holway Report'. Comparison of the rankings of UK SITS players between that first Holway Report in 1988 and the the latest one may, on first sight, look very different. But in fact the companies are pretty much the same - only the names, order and ownership have changed! EDS was, of course, Systems Designers back then (they hadn't even made it to SD-Scicon). Capgemini was still Hoskyns. I could go on.

I was very interested in reading Phil Codling's observations on the latest (2006) rankings. In particular the changes in 'country' ownership with the UK holding its own but the US declining. Of course, we expected significant growth from the Indians. But I suspect the real winner both this year - and next - is 'surprisingly' the French. Phil notes the advance of Capgemini and, of course, Atos Origin is up there in the higher echelons too. Next year Xansa will be French owned after its purchase by Steria. And who knows who will own LogicaCMG next year?

I hope Ovum will not mind me reproducing Phil's note below. At least it's a plug for the 20th edition! It's the first edition where I have made no input and, I suspect, it will be the last with any reference to my name. Feel a bit sad really!

Ovum Hotnews
10 Aug 2007
10:55 Ovum's latest UK rankings highlight industry evolution
Phil Codling

This week we've been finalising our UK software and IT services industry rankings, ready for publication next week. There's good news for EDS, which takes back the no.1 spot thanks to a year of MoD-driven growth. The most striking recent success story in the upper echelons has to be Capgemini, which jumps to no.4 in the table this year. As recently as 2003, the French firm was on the verge of dropping out of our top 10 altogether. Its challenge now is to find another growth engine to replace its HMR&C mega-deal, which is beginning to mature and generate less growth for the business. EDS faces a similar issue: massive though they are, the DII engagements will not drive growth indefinitely.

Some of the most interesting analysis we've done on the latest ranking table involves changes in market share by country over time. It's become commonplace to bemoan the lack of home-grown presence in the software and IT services industry. However, UK-based players have managed to sustain their share of the revenues of the top 50 players (with their combined share falling just one percentage point over the past three years from 29% to 28%). Over the same 'post-boom-bust' period, UK representation in the top 50 has dipped slightly from 26 firms to 23, but it's the US that has really lost out. Its corporations have under-performed the UK market in the last three years and have consequently seen their share of top 50 revenue fall (from 54% to 47%). That's despite the acquisition-fuelled expansion of a number of major software firms, notably Oracle, and reflects just how hard it has been for the large global outsourcers to grow and adapt in a mature, multi-sourcing environment.

As for the growing nations, India not surprisingly stands out. Driven by sustained demand for offshoring capability and lower prices, the country has tripled its share of top 50 revenues since 2003 and now has four representatives (TCS, Wipro, Infosys and HCL) in our rankings. But for all the growth of such players, it's worth noting that their market share remains pretty low - at just 5% of the combined revenues of the top 50. Indeed, Japan with just one representative in rankings -Fujitsu - still claims a bigger slice of the top 50 than India!

Testing times for markets

There is unlikely to be any reader who is unaware of the turbulence in the stock markets right now. I unfortunately have to claim I was correct in forecasting (26th July) that the FTSE100 would test 6000. It closed Friday on 6038 - a whooping 10% off its peak of 6600 at the beginning of June. I think that is now officially referred to as a 'correction'. Only a 'crash' is worse.

Interestingly NASDAQ actually rose 1.8% last week. Indeed UK stocks were much more badly affected than US. The Techmark was down only 1.1%. My own tech portfolio took a beating but is still above water. My Apple shares were up 51% a couple of weeks back - but are now up 'just' 37%. The only stocks now under water are BT - down 7% - and EDS - down a massive 16% - since I bought them in early 2007.

You do have to ask yourself about the intelligence of the financial community. Surely everyone knows that if you extend mortgages to those with dubious credit ratings, you will get defaulters. Everyone knew this didn't they? Also, didn't everyone know that if you lend money to fund private equity deals at low interest rates and without any security, when interest rates increase you get more defaults there too. Then, of course, we all thought we were OK because we are not engaged in either activity. Except that our banks are and our pension schemes are exposed. This is made even worse as nobody knows exactly which banks are most exposed.

The next time I run a business and get a lecture from my bank manager on how to run it...I shall remind him of this.

Mouchel Parkman buys HBS for seemingly bargain price

Mouchel Parkman has bought local government BPO player HBS from private equity firm Terra Firma for £46.2m .

Despite beeing loss-making, I still find that a pretty amazing price which represents a PSR of about a third revenues. That's even less than the 50% PSR that UU sold Vertex to PE firm, Oak Hill, in early 2007. And its a lot lot less than the £100m Terra Firma paid for Hyder Business Services - how HBS was previously known - just a few years back. Indeed this is the first time I have seen Private Equity selling their BPO stakes other than in IPOs.

But HBS had a sullied reputation after losing the Bedfordshire CC £260m contract in 2005 although it seemed to be doing a lot better lately. Indeed it had a partnership with Mouchel Parkman in the successful bids at both Oldham BC and the new shared service initiative at Somerset. Clearly the coupling makes stategic sense for Mouchel Parkman.

But it does show that, from an investment viewpoint, BPO is not the 'road to riches' at first thought - except if you are Capita, of course!

The Myth of New businesses, New jobs

I guess I too have been guilty of manipulating statistics in my role as an analyst, but the main culprit always sees to be the Govt.

Can I ask you to consider the following statements?
- The rate of business start ups has decreased since Labour came to power in 1997 from 3.2 per 1000 people to 3.0
- The total number of businesses operating in the UK has increased by 600,000 to 4.3m under Labour.
- 1,288,745 young people in the UK between 16 and 24 are not in employment, education or training. An increase of 15% since Labour came to power to 1997
- The Govt has helped 700,000 people aged 18-24 back into work since 1997
- Employment in the UK increased by 93,000 in the three months to May to 29.08 million, the biggest total since records began in 1971.

The first reaction is to say that they are contradictory. But in fact all of them are "true" in their own way.

Business start ups are down but those businesses have had a better survival rate leading to the increased numbers. Is that good? Or is it showing that "entrepreneurship" is declining in the UK? I think we need to encourage more people to setup businesses, hence my interest in the Prince's Trust Business Programme.

As Chairman of the Prince's Trust Technology Leadership Group, I am also well aware of the problems that youth unemployment is creating. Unemployed youngsters are 20 times more likely to commit a crime and unemployed young women are 22 times more likely to be single mothers. And the numbers of young people not in employment, education or training just keep rising. Indeed the UK has the highest rate in Europe.

But the numbers in jobs, even in that age bracket, continues to increase! The problem is that the number of totally unskilled skilled jobs in the UK has declined greatly and those that still exist tend to go to immigrants. Digby Jones recently told the Welsh Affairs Select Committee "We have always had this huge tail of unskilled people but, of course, we used to do something with them, it was not so prevalent in our society, it was not so much 'in your face' or on your radar screen because we used to send them down the pit, we used to put them in the fields, we used to put them in car factories, shipyards, steelworks, cotton and textile mills.
There were loads of jobs for people in this country who could not read, write or count. China has had your lunch and India has had your dinner and they are not there anymore.”

As Digby says most of these kind of jobs have either gone to China or India or have been automated. Many of those that remain in the UK are being taken by immigrants. (That's not any kind of racist comment either. Just go visit any seasonal agricultural activity right now and you will find few English youngsters bent double in the fields. A few years ago, in our place in the Lakes, all the people serving in the local restaurants and shops over the summer were local young people or students - now it seems they are all Poles)

Of course, what we need are more trained young people to do the jobs that not only still remain in the UK but where the UK is doing really well. But solving the education problem in the UK seems to have defeated most administrations in my lifetime. So we are left with a huge and increasing youth unemployment problem with equally huge knock on consequences for the whole of society.

I guess that is the real reason why I dedicate so much of my time to the Prince's Trust - one of the few organisations that seems to "make a real difference" in this area.

Alchemy and Civica

According to press and broker comment, it was Alchemy which was the 'mystery bidder' for Civica. They pulled out last week due to uncertainties in the debt market. As a "see what you missed" statement. Civica yesterday announced contracts worth c£50m with Sheffield City Council and Essex CC.
Assuming the 'rumours' to be true, this is a whole new episode in the PE story. We've now got used to PE firm A buying the interests of PE firm B - that was pretty unknown a decade ago. Now we have PE firm A re buying the interests it owned just a few years back.
Publicly quoted Sanderson was bought by Alchemy in the heady bubble days of Dec 99 for £114.5m. As a private company, it was split into three. Civica, Talentra and...Sanderson.
Civica IPOed in early 2004 as did Sanderson in late 2004. Talgentra still exists as a private Alchemy backed company but it sold its Tallyman collections operations to Experian a few months back. Not quite sure of the total return Alchemy will have made from all these but it's significant. There was a time in the early 2000s when it had looked an expensive mistake. We should never underestimate Mr Moulton!
Of course, the logic of a Public-to-Private bid for Civica revolves around putting it together with the local govt. operations of companies such as Northgate and Anite.

M&A "Past the Peak of the Plateau"

As many of you know, I've had a (very) long association with Peter Rowell and M&A specialists Regent Associates. Indeed, at the first occasion I was able, post Ovum, I was appointed as an NED in Apr 07.
Today, Regent has issued its European Technology Acquisition Review for H1 2007. Send me an email on rholway@holway.com if you would like a full copy or read the Press Release Click here.

Basically in the first half of 2007, 1642 deals were announced, which maintained relatively even activity levels over the last two years. However, the decline in Q2 on Q1 2007 suggests that whilst activity has reached a plateau, we might be nearer to the end rather than the beginning. “Whilst we have no concerns that acquisition activity in the technology sector is about to grind to a halt, the indications are that after two years of stability, we starting to see the beginnings of a gradual slow-down. We are probably just past the peak of the plateau.” said Peter Rowell, Chairman of Regent Associates .

Other indicators that support this shift in market direction include, firstly, the percentage of acquisitions made by the Private Equity community reached 16% of all deals (an all time high) – meaning a greater decline in trade acquisitions. Second, the percentage of transactions that are divestments from larger groups is edging up from the all time low of 27% last year – demonstrating a level of cautious house-cleaning. Third, the percentage of deals undertaken by American buyers was just 12% - suggesting a slight slowdown in their global ambitions.

“None of these factors, when taken in isolation are significant. However, when taken together, they suggest there is possibly a window of 12 to 18 months before we can expect an overall slowdown in activity and consequent decline in valuations.” Rowell concluded

I cannot but agree with Rowell. I think the glory M&A days are over. Private Equity fuelled prices and the days of raising easy "Cove-Lite" money is over. I think that trade purchases will continue - albeit at lower valuations. If Stock Markets continue to "wobble" IPOs will continue to be out of favour.

As Manfred Mann once nearly said "If you've gotta sell, sell now or else you might wait for a long time".

Share Indices for July 07

As we noted last week, it was a horrid week for stock markets and tech. As you can see from the table above, the markets gave up all - and more - of the gains they made in the early part of the month and, with the sole exception of UK Software and Computing Services stocks, showed losses for the month. The worst performance came from UK mobile - down 10.4%. Indeed Telcoms was bad overall as investors didn't much like BT's Q2 results.

Xansa was the best performer amongst UK SCS stocks last month - up 48% on the month due to the bid from Steria. iSoft gained 33% for similar M&A reasons after the surprise intervention of CompuGroup to displace IBA as the most likely winning bidder. Chelford said their H1 results would be "significantly" head of expectations which resulted in a 35% boost to their share price. Triad (+23% ) and MicroFocus (+15%) also gained in positive trading statements and results.

As I write, markets seem to have regained some of their composure. I still remain in a state of nerviousness. I can still see a 10% reduction on the cards.