Serco makes US SITS acquisition

Just as Capita doesn’t want to be described as an IT company, the same applies to Serco. Problem for Holway was that in 2005 Serco acquired ITNET which had quite clearly been designated as a SITS company. Indeed, Serco are one of the largest suppliers of SITS to the UK public sector and the third largest supplier to the UK Local government sector.

So news that Serco yesterday has acquired SI International – a NASDAQ quoted provider of SITS services to the US Dept of Defense – is clearly of interest. Serco are paying $423m. See FT Serco targets US with agreed SI bid. Analysts seem to believe Serco has overpaid, however.

COA Solutions announces annual results

Business application provider, COA Solutions, has announced its results for the year ending 31st March 08. Revenues increased 10% to £55.7m. Stripping out the effects of their purchase of Version One in 2007 would probably reduce organic growth to nearer 5%. Still pretty acceptable given market conditions.. EBITDA was up 24% at £12.4m – a pretty impressive 22% EDITDA margin. Order intake grew 41% which gives confidence for the current year. Indeed, I was pleasantly surprised to see that new software licence sales represented 29% of COA’s annual revenues. All important and predictable recurring revenues from maintenance and support represented 44% of revenues.

All this contributed to a positive cash flow movement of £8.1m. Since the year end, COA has completed the acquisitions of eProcurement company Belmin (Mar 08) and HR specialist ASR Computers (Apr 08).

Readers with their memory banks still intact will recall that COA rose from the ashes of Cedar which was ‘rescued’ by Jon Moulton’s Alchemy back in 2002. It is salutary to remember that Cedar at its height had a market valuation of over £1b but was bought by Alchemy for c£4m. Alchemy promoted Fiona Timothy to CEO and I’ve taken a very close interest in COA ever since. Fiona is now Chair of COA Solutions and Mark Thompson is MD.

COA has hoovered up a number of well known brands in the business application space. Starting with Elevon (who had bought Walker and QSP) in 2002 and, as the years went by, Open Accounts (COA is an acronym for Cedar Open Accounts), Goldenhill, OpenPeople, Strata and Version One in 2007 as well as the two 2008 acquisitions noted above.

Fiona Timothy tells me COA are on budget at the moment and aren’t experiencing anything like a slowdown. Indeed “the volume of leads is up dramatically”. Only observation was that maybe rather more people are getting involved in the decision making process which might slow things down a bit.

Readers should remember that COA gets 88% of its revenues from existing clients. As I have said on many occasions, this can be a great defence against any slowdown. New product to new customers is a difficult place to be right now. To use my housing analogy again, if house sales are down more people decide to spend money on home improvements. This can really benefit the likes of COA with an extensive and largely loyal customer base.

So what next for COA? In ‘normal’ times, one might see COA as an IPO candidate. Frankly, even in those ‘normal’ times I’d consider them still too small for the full gaze of the public markets. There seems to be little pressure from Alchemy to IPO and they are also supportive of COA’s ambitions. I think they’d back any sensible acquisition plans COA might put forward. But at some point an exit will take place. Clearly the most likely outcome now will be either a trade sale (afterall it’s the kind of company which, after Axon/Infosys earlier this week, might appeal to an Indian player!) or a secondary Private Equity deal (as in the Iris/CSG rollup by HG which was then ‘sold on’ to H&F last year)

The downside of SaaS

Can I commend you to read the excellent article by Richard Walters in today’s FT – The end of the software gravy train. You will have heard the theme many times on HotViews. SaaS is an unstoppable train but it will be extremely damaging (at least in the short/medium term) to today’s software players who rely on upfront software product licence revenues + forever recurring maintenance and support. SAP and Microsoft are amongst those with most to lose. Even the new upstarts – like Salesforce.com – are having trouble making the SaaS model work from a financial performance viewpoint.

It all has echoes, for me, of the BT ‘problem’ with Broadband in the 1990s. If it rolled out Broadband it would hit its extremely lucrative ISDN revenues. If it did not, competitors like the cable operators would eat their lunch anyway.

As I will be saying in my Revolution presentation in September, we have reached a similar tipping point. Embracing a new modus operandi is much easier without past baggage. Changing existing models is damned difficult. History shows that this is often when “The first one then will later be last”. I think the next few years are going to be extremely difficult for the established software players – and therefore extremely interesting for us analysts and users!

Xpertise shareholders vote against Parity Training offer

Just to update you on my piece yesterday - Xpertise bid puts Parity bid in jeopardy - Xpertise shareholders voted against the offer for Parity Training at their EGM yesterday which clears the way for the QA-IQ bid for Xpertise to proceed. We will hear more from Parity at its results breifing on Friday.

HP completes EDS deal

So the HP acquisition of EDS is finally a done deal. The $13.9b deal announced back in May, has created a services business with annual revenues of more than $38 billion (based on FY2007 results) and 210,000 employees, operating in more than 80 countries. HP+EDS is now the second largest IT services organization globally (IBM is top dog)

EDS will become HP’s fourth line of business; retaining its Plano HQ. Ron Rittenmeyer remains as EDS CEO. Indeed, HP is folding its Technology Solutions Group into EDS. Here in Europe, Bill Thomas remains as Senior VP EMEA. You can see the rest of the Executive Line up on the ZDNet site here. I also understand that Sean Finnan has ben named responsible for combined services business UK and Ireland (one of the roles he had already in EDS)

In their Press Release today, HP made great play of the fact that, by value, this is the largest ever in the Software and Services sector and the second largest ever in the technology sector. The largest was, of course, another HP purchase – that of Compaq back in 2002. That was bad strategy, badly executed. It brought the end to HP’s CEO and nearly busted the company.

HP+EDS is actually ‘good strategy’ BUT the really risky part of the job is only just starting. Can HP execute a reasonably smooth integration? Can HP avoid a ‘clash of cultures’? - the reason why most mega acquisitions fail. EDS is about services – not products. Services are about people, their skills and relationships. EDS has a strong culture and some damned good people. I’ve long rated Bill Thomas as a “Best of Breed” and am therefore glad that he is staying on. But why didn’t he get promoted as many (like me) expected? What is going to happen to the many really excellent managers that report to Thomas in EMEA and specifically in the UK? I await the answers and will, of course, bring them to you as soon as I can.

Afterthoughts - Axon and Infosys

If you read the full Stock Exchange announcement from Axon commenting on the Infosys deal you will come across the following Background to and reasons for the recommendation of the Acquisition by the Axon Directors:

Whilst the Axon Board is confident of Axon's ability to succeed in its global market, the industry in which Axon operates is subject to a number of challenges. Over recent years, the number of overseas new entrants with significant structural advantages has presented an increasing competitive threat to European and US service providers. The ongoing consolidation of the IT services sector has created a small number of major global service providers with considerable scale and breadth of offering. These companies are able to provide a more complete service offering compared to niche players like Axon, including large scale outsourcing and support for systems other than SAP, to large enterprise customers. In addition, IT services remains a highly cyclical industry and, although current trading remains resilient, the uncertain global macroeconomic environment represents a threat to Axon's future performance on a stand-alone basis.

Axon is facing two big problems. First, it's too small to go after the increasingly larger deals that are on the table and which are its key focus (50% of its revenues comes from its top 5 clients, 61% from the top 10). Infosys gives it both scale (customers will be dealing with a £2.5B revenue company, not a £200m revenue company) and "rampability", i.e. 'instant' access to a vast resource pool that can quickly be deployed on new projects. Secondly, despite having some one-third of its people in low-cost geographies, pricing competition is becoming more acute – not just from the Indians but from all around, especially the highly offshore-leveraged players like Accenture and IBM. Indeed, Steve Cardell made the point that competitors who were coming under pressure in their own core verticals are now encroaching into Axon's space looking for fertile new ground. Infosys gives Axon the low-cost delivery it needs to compete.

There's another reason too, not really evident yet, but clearly obvious to the Axon directors if you read the statement above. Axon's services cover the SAP application space but not infrastructure or business processes. So when clients want to outsource infrastructure management (IM) or BPO associated with their SAP applications, they have to go elsewhere. It's no secret that the Indian players see IM and BPO aas strategic services and use them to infiltrate new customers. This gives them a beachhead to move up the value chain into application management (still their heartland) and beyond. Axon would have no answer to this and would find themselves increasingly being squeezed once other players had foot-holds in their key accounts.

So the timing is right – do the deal while the business is still growing and profitable and get a reasonable (not stellar, but reasonable) price. Of course there are very clear lessons here for UK IT services companies that have not yet got the message. It's not that you have to go offshore to survive. That's a given. You also need to understand that the offshore (and offshore-enabled players) will attack your clients not just in your own service lines, but below and above you too. Mid-size IT services firms servicing large enterprise customers have little hope of being full-line services players; they should feel a strong sense of urgency to find benevolent partners, if not acquirers.

Footnote – Interestingly, Axon’s share price has currently (Tuesday 2.00pm) risen to 609p – ie above the offer price. Part of that is due to the dividend which will also be paid. But are investors really expecting a rival bid?

Update - The counter bid talk continues in the media this morning (Wednesday) with the FT - Axon rises 21% on persistent talk of did to counter Infosys - ending its report as follows:
"Steve Cardell, chief executive, said Axon had had "several chats around the coffee machine" with rivals but denied rumours that it had been talking to Fujitsu earlier this year over a deal at 700p per share."

Xpertise bid puts Parity bid in jeopardy

QA-IQ has made a 150p bid (or nearly double the previous closing price) for IT training company Xpertise, valuing them at £8.7m. One of the conditions of the bid, however, is that Xpertise drops its bid for Parity’s training operations.

I’ve just spoken to Alwyn Welch, Parity’s CEO, who was not exactly pleased with this development. The divestment of their training operation was clearly a way for Parity to refocus its operations and this must be a considerable blow. Whether there are other likely bidders in the wings, only time will tell.

Another day, another two bids for quoted UK SITS companies. Back in 2000, I had over 300 companies in my main and AIM market listings. It’s about a third of that now. Indeed, it’s the mid-sized companies that have been most seriously depleted.

Maybe, one day , I'll be sitting in my rocking chair telling my grandson "I remember when there were IT companies quoted on the London Stock Exchange". He will look up at me and say "You must be really old Grandad".

Infosys to acquire Axon for £407m/600p

Indian Infosys has just announced an agreed/recommended bid for UK Axon ; valuing Axon at £407m/600p per share. This was a relatively modest 19% premium to Friday’s closing price. Indeed, at ‘just’ 13x 2007 EBIT and 2x 2007 revenues, the price Infosys is paying looks extremely reasonable. Maybe there was something in the interims to be announced tomorrow/Tuesday that might have shocked? Anyway I see that all the Axon founders – including Mark Hunter – have provided irrevocables representing c18% of the equity. So this is almost definitely a 'done deal'.

Axon had revenues of £204.5m in the year to 31st Dec 07; producing an operating profit of £30.6m and PBT of £29.5m. Ie an operating margin of 15%. Although this might seem rather good by UK/European standards, it's still appreciably lower than infosys' 22% margin. Axon makes 61% of its revenues from EMEA (the vast majority - 55% - from the UK), 34% from North America and just 5% from Asia Pac. Infosys claims that its SAP practice has 2100 employees (compared with 2000 at Axon) and services clients in 20 countries. The combined operation with Infosys’ existing SAP operations “will create a global SAP player”.

Despite the global (and IT) downturn, SAP-related services remains a high-growth area. Many players currently complain that their SAP services growth is supply constrained. Infosys claims their SAP practice is growing 65%+ CAGR; other Indians are seeing similar growth rates. It’s not new applications that are driving growth (though there is still some of this, but not much). It’s things like consolidation of multiple SAP platforms, plus upgrades to SAP’s latest releases (customers get penalised with higher maintenance charges if they linger on old versions!), and of course, moving application management offshore. In other words, it’s all about cost reduction. The Indians that are seeing their SAP practices grow fastest (compare Accenture at 30%, IBM at 10%) because they have the lowest delivery cost.

Axon brings another slew of clients to Infosys where it needs them most – in Europe. Infosys gets about 27% of sales from Europe, which should pan out to around £600-700m in ’08. The extra £120m+ of EMEA revenues that Axon brings will come in very handy, albeit at around half of Infosys’ margins.

So Infosys plus Axon is EXACTLY the kind of link-up I anticipated. The Indian players are really interested in buying companies with strong IPR/niche positioning where they can use the onshore expertise to ‘pull through’ the project and recurring revenue streams. This latter part is where the offshoring element comes into play creating the mother of all ‘blended delivery’ models.

As far as I can see this is not only the largest acquisition of a UK SITS company by an Indian player on record but probably the largest acquisition in the SITS space globally by an Indian player. I have, of course, been forecasting this for the last five years! As I have said on many occasions, Holway’s forecasts are usually correct – it’s just that he often gets his timescales wrong!

One of the potential problems I see in this deal is Infosys’ relative lack of experience in M&A. It is only Infosys’ second deal (the first was Expert Information Systems in Australia in Dec 03 for $23m). So as this is the first time for Infosys to integrate a sizeable acquisition, they will be learning on the job. We all know how tricky it is to integrate people-based companies when in the same country and culture, so this will be no picnic! Certainly Axon’s top consultants will have little problem getting jobs elsewhere if they feel uncomfortable with Infosys holding the reins. (I will refer readers to Mark Hunter’s infamous response to my question when I was chairing a public debate in 2007 “How do you intergrate acquired staff into Axon?”. His reply was “We tell them to FI-FO”. “What’s FI-FO?” asks an unsuspecting Holway. “Fit in or F*** off” was his reply)

Bluntly, I have thought that Axon getting swallowed up was inevitable after its founder, Mark Hunter, stepped down. As readers will know, I had great respect for the man and his achievements. See my 30th Nov 07 post - Mark Hunter steps down from Axon. But I have mixed feelings – to say the least – about yet another of our finest indigenous SITS companies going into foreign ownership. With the pace of public-to-private acquisitions showing no slowing of pace, I really do wonder if there will be any UK quoted SITS companies of any size left soon.

Footnote – I was an Axon shareholder but sold all my holding last year at c800p when Mark stepped down. Since then Axon share price had halved before staging a recovery in the last few months; possibly spurred on by a possible acquisition. Just for once, I therefore don’t have any regrets for this previous sale decision!

Musical inspiration

You might have read last week about Tim Wheeler of the property group, Brixton, turning to Dylan for inspiration at their interim results announcement. He quoted from Bob Dylan’s All along the watchtower. Lines like “There's too much confusion, I can't get no relief”, “None of them along the line know what any of it is worth” and “There must be some way out of here” all seem rather apt in the circumstances!

I’ve been using songs in my presentations and analysis for most of the last decade. I won’t claim to be the first (although I don’t personally know of any regular users before me) but I would claim to be the most persistent. Being a teenager in the 1960s, when music came alive, means that music has played a huge part in my life. In the over-used phrase “Music has been the soundtrack to my life’ and, as I’ve always found it impossible to separate my personal from my business life, song lyrics keep popping into my mind whenever I want to get a concept or view over.

I’m thinking of issuing a Holway’s Greatest Hits album which would include all the tracks I’ve used. I've given the track listing above.

I think the first time I actually played a track in front of an audience of 500 was at my “State of the ICT Nation” speech for the CSSA (Now Intellect) in 1999. I used Nat King Cole’s version of There may be troubles ahead. It turned out to be one of my most prophetic speeches. The industry really did have to “Face the music and dance” to a rather different tempo in the year that followed. Indeed in 2001 I used Billie Holliday’s Stormy Weather as “Life in bare, gloom and misery everywhere” seemed to sum up the mood of the time.

Early in 2002, I followed it up with a ‘special’ version of Paul MacCartney’s Yesterday. I had worked out how the net value of the companies when they had attended my 2000 talk had changed in just two years. I changed the lyrics to:

“Suddenly, I’m not 10% the man I used to be
There’s a shadow hanging over me
Oh, Yesterday came suddenly”.

Oh, how cruel!

Later in 2002, I gave my first talk for the Prince’s Trust. It started with a snatch of Rolling Stones IT’s all over now. I predicted that the days of double digit growth for IT were over – for ever – and that we would be lucky to keep pace with GDP. I got more feedback from this one talk than any I have given before or since. The press comment filled a lever-arch A4 file and included “Gloomy” The Times, “Glum” The Daily Telegraph, “In a minority of cynics” Financial Times, “Downbeat” Computer weekly, and (perhaps the cruelest of all) “a surrender to a dotage of Werther’s Orginals” from Computing. I should remind readers that my forecast was far from gloomy as IT has NOT even kept pace with GDP growth in the period 2002-2008.

In 2003 I used David Bowie Ch-Ch-Changes – a personal favorite of mine. I wanted to get over that the days becoming a millionaire overnight from a dot.com scam were over.
“Don’t want to be a richer man
Just gonna have to be a different man” seemed appropriate.

It wasn’t all negative. In 2003 I also used Jimmy Cliff’s I can see clearly now in a speech entitled 2020 Vision which looked forward to the IT world some 17 years in the future. It was all about how the mobile internet would takeover. Five years on and I wouldn’t change a word. In 2004 I used the Beatles Getting Better all the time as the IT industry at long last returned to growth.

In late 2006, I used The Who’s Who are you? and Adam Faith’s Who am I? in a rather personal way at a big presentation at the V&A. I had just left Ovum Holway on the Datamonitor acquisition and I used it shamelessly to hammer home the view that company culture and identity really mattered. Mess with it and the very people who create the culture and identity leave. And so, as they, did it come to pass…

I used John Lennon’s Power to the People in 2007 to forecast the advent of social networking and user generated content – a theme I had first used in 2006.

So to the latest theme which I am using in my talks throughout September culminating in the Prince’s Trust (SOLD OUT) ICT Leaders Dinner atop BT Tower on 25th Sept 08. It’s the Beatles Revolution which, by a quirk of coincidence, was top of the UK Hit Parade exactly 40 years ago in Sept 1968 (Double A side with Hey Jude). In a way it is a culmination of all the themes I have ever used. It is all about how all the many disparate developments that I have previewed over the last 10 years are all coming together, all converging, to create what I believe will be the biggest-ever technological revolution having far-reaching effects on suppliers and users alike. I’ll post more details closer to the delivery date.

Having seen Mamma Mia over the Bank Holiday weekend, I guess I should sign off with Thankyou for the music.

PA Consulting in the news for all the wrong reasons

The headlines today give news of yet another data loss by HM Government. This time a missing memory stick which includes un-encrypted details about 10,000 prolific offenders and data on all 84,000 prisoners in England and Wales. The data was in encrypted form on-site but was unencrypted by PA Consulting and put on a memory stick. The consequences of this data loss are even more serious than the others as it could literally be a matter of ‘life or death’ if some of this information fell into the wrong hands. Assuming the reports are correct, it does look like a monumental security failure and one that the simplest set of rules should have avoided.

This is seriously bad news for PA Consulting. They have made security into a key part of their business. Indeed they are one of the contractors on the Govt’s ID project where they are a ‘client-side’ adviser to the Home Office. You could legitimately ask if PA Consulting cocks up like this, what confidence can anyone now have in personal data security of any info held by any Govt agency?

PA Consulting is one of the oldest consulting firms – established in 1943 as Personnel Administration. With reference to the current economic downturn, PA Consulting had a very hard time in the last major downturn (1989-1992) and were probably all but bankrupt when Jon Moynihan was appointed as CEO and managed to really turn them around. They were also hit (but not so badly) in the post Y2K downturn too. I’ve reported on several aborted takeover attempts in the last decade. I’ve known of many more companies who have looked at PA Consulting as a possible acquisition target. Well, there are very few private companies of their size left. In the last year, its parent company, PA Holdings recorded a pre-tax profit of £52.5m on revenues of £407m.

Nobody from PA seems willing to talk to the media this morning. I would strongly suggest they get the best PR advice (and quickly) to help them salvage their reputation.

Autonomy and the FTSE100 - Correction

I have to admit basing my piece on Autonomy’s possible (re)entry into the FTSE100 on an article in the FT. I have been asked to point out that the FT got it wrong in saying that the review was ‘next week'. The FTSE UK Series (which includes the FTSE-100) is reviewed and announced on 10 September 2008. Changes resulting from the reviews are effective after the close of the respective markets on Friday 19th September 2008, i.e., from start of trading on Monday 22nd September 2008.

All the other points I made are just as relevant whether the review is ‘next week’ or ‘next month’. I have to say that that if the FT, which co-owns the FTSE, can’t get these things right, what hope the rest of us

Autonomy and the FTSE100

I see that Autonomy is tipped to rejoin the FTSE100 at the quarterly review this week. (See FT 16th Aug 08 – Autonomy poised to rejoin FTSE100) A quick search of HotViews will show that not only have I written many pieces about Mike Lynch and Autonomy but I am somewhat of a fan of both. Mike Lynch is a supporter of the Prince’s Trust, so we have met often. Also I think that Autonomy is a fine example of the kind of software company the UK is capable of producing – but does so too rarely.

Much of the media speculation about Autonomy now centres around whether they can sustain their FTSE100 position. The ‘problem’ is that Autonomy is exactly right for today’s difficult positions. It’s products help financial institutions meet compliance and disclosure. Their products are tailor-made for searching out tell-tale signs in emails or whatever which might identify a potential terrorist. All this means that not only has Autonomy done well but its shares are highly rated. A slight future wobble might well cause a crash.

Just like Capita, my views about the company are one thing. Its share price is quite another. Both great companies with great potential. But I think I must leave the share tipping to others!

Footnote - I see I got quoted in Sarah Arnott's article on Autonomy in today's Independent. To read Click here.

SITS companies and the FTSE100

So, with Autonomy (see above) we might get our second UK software company in the FTSE100 to join Sage. (Note - I have always been at odds with others (including Rod Aldridge and Paul Pindar!) by claiming Capita to be a SITS stock. But that’s a discussion for another day.)

Turn the clock back 8 years are things were quite different.

Back in 2000, the dot.com boom had propelled seven SITS companies (eight if you include Capita) into the FTSE100. Six fell out fairly smartish when the deck of cards collapsed.

Let’s look at them.

Autonomy. Autonomy spent just one quarter in the FTSE100. It had been ‘worth’ £3.5b at its peak when its shares had hit £30 but crashed to 80p soon after. Today, Autonomy has a market value of £2.5b and its share price is £11.43. So how happy you feel today depends when you bought in!

Baltimore was worth over £2b back in 2000 when it entered the FTSE100 – indeed it was valued at $13b at its height. “Crash and Burn” is as good a description as I can think of for this encryption company which was begat from Zergo. Shareholders lost practically all of their value – although the company is still in existence with a quite different mandate.

Sema was worth over £4.5b back in 2000 when it made the FTSE100. Sema was a merger of the UK’s CAP with France’s Sema Metra. Sema hit bad times post 2000 and was first bought by oil company Schlumberger before the French orchestrated its purchase by Bernard Bourigeaud’s Atos Origin. The whole of Atos Origin is now valued at less than £2.5b, so I think you can draw your own conclusions about the current value of the Sema bit.

Misys was worth £4.2b when it entered the FTSE100 under the leadership of Kevin Lomax. He should have quit whilst he was ahead. Even today, Misys is ‘worth’ just £830m – and that is considerably higher than its nadir before Lomax finally departed; not before time.

I’ll cover CMG and Logica together. They both entered the FTSE100 in 2000 with valuations of £5.2b and £4.2b respectively – ie £9.4b in total. Logica and CMG subsequently merged and today the combined entity is ‘worth’ £1.9b. Martin Read (the previous Logica CEO) told me that his ambition was to see Logica back in the FTSE100. He didn’t. It would be a brave man who forecast that Andy Green would achieve that objective. But I can only live in hope!

So that just leaves the two companies who retained their FTSE100 membership.

Sage was worth over £7.5b in 2000 – they are currently ‘worth’ £2.7b (that’s not greatly more that Autonomy’s £2.5b) My biggest FT headline was in 2000 when I described Sage’s near £10 share price as NORTH OF STUPID. Well, they had a P/E of 184 at the time! I remind readers that Sage has never had an earnings reversal and their EPS today is appreciably higher than it was in 2000. It’s just that Sage was considered as THE UK’s internet stock back then and was rated far too highly. It’s a very good case of over-egging the pudding. Sage was and still is a great company. I rest my case.

Finally, we get to the real star – Capita.

Capita was valued at £2.6b back in 2000 when it entered the FTSE100. It is now ‘worth’ £4.4b. The only company in this list to be worth more than in those crazy dot.com days. Capita’s management were right not to want any association with those 'here today, gone tomorrow' tech companies (I remember Paul Pindar saying to me in 1999 that he would never want to be in the same index as Misys!)

Footnote – The 2000 valuations quoted above were taken as at mid-April 2000 from the 2000 Holway Report. Current valuations are as at close on 15th Aug 08.

Irrationality or Living in Denial?

Last Friday I wrote a long piece entitled GDP, inflation, IT services growth and all that. I ended the piece as follows:

If I can offer just one lesson learnt from previous downturns, it is that our industry always seems to ‘Live in Denial’ when faced with a slowdown. “It will not affect IT”, “It will be short-lived”, “Let’s wait until the end of the month, quarter, year before we take any cost-cutting action”.

UK SITS is facing a downturn. I think you should prepare for no growth in 2009.

Last Friday, the FT also published a long piece entitled Back to Bust – High technology heads for harder times. I do commend you to read it. It gives the starkest warning yet that 2009 is going to be really tough in the enterprise space and any thought that consumers would bail us out (as they have done in recent years) is rather optimistic. It makes the point that many (most?) Web 2.0 companies depend on advertising and that is set to be a difficult area with even Google heading for difficult times. Most Web 2.0 companies have yet to make profits and are burning cash (just as the dot.coms did last time). New fund raisings are likely to be difficult. Many will go to the wall (just as the dot.coms did last time) Their demise will affect larger companies all the way up the value chain (just like it did last time).

Last Friday, the media gave their verdict on Andy Green’s first results announcement as CEO of Logica. They were kind to Andy’s personal performance but most observers remain unconvinced about Logica’s longer term prospects. Philip Staffird in the FT – Signs of green shoots at Logica - seemed to borrow some of my points (eg ‘Some analysts have been concerned about its position as a mid-sized general IT services group in a market dominated by smaller specialists and large US and Indian groups’). The Times piece – Bold stand by Logica’s Green – was pretty typical. It ended with the comment “While Mr Green did a great job building up BT's global reach, he has less experience of retrenchment. He would not be the first chief executive to convince himself that his customers would be irrational to cut back on his services in a downturn - only to find that his customers were indeed irrational.”

Whether Logica’s (or indeed any IT services company’s) customers would indeed be considered ‘irrational’ to cut expenditure in a downturn is debatable. I would suggest that many customers will have no choice. I sincerely hope that Green, and the other CEOs of the leading IT services compnies, are not ‘Living in Denial’ either

I repeat - UK SITS is facing a downturn. I think you should prepare for no growth in 2009.

GDP, inflation, IT services growth and all that

I’ve had some very interesting responses to my footnote to the Logica piece yesterday where I explained that GDP was a real growth number which excluded the effects of inflation. Therefore, if you compare this to SITS growth, you should exclude inflation in the comparison here too.

To answer some of the points:

1 – We've had high inflation and recessions before
Obviously a lot of HotViews readers are either young or have short memories. Unfortunately I can remember 1976 when inflation reached 24%. GDP growth that year was ‘only’ 2.8%. SITS growth was 32% but ‘only’ 8% in real terms. In 1980, we had a real recession. GDP fell 2.1%. Inflation was an equally mind-boggling 17%. But SITS managed a 10% growth in real terms as we all got hyped up about micro computers and the impending launch of the IBM PC.

2 – Will headline growth rate go negative?
I think what CEOs are most worried about is, as one said in an email, “a sudden nosedive in the absolute size of the IT services market a la 2002 and whether we will start to decline in absolute terms in revenue putting intolerable pressure on margin”.

Since I started in IT, I have only known one year when the headline SITS growth turned negative – that was 2002. We got very close to it 1971-1973 and 1991-1992 but it never turned negative.

Currently I am NOT forecasting a decline at the headline level in 2009. Indeed I am forecasting a 2% headline growth in UK SITS. But that equates to a decline of 2% in real terms as I explained yesterday.

The problem is that when you are playing with such low figures as this, margins can still be eroded which is why cost control (which inevitably means wage control) is key. Moving more work offshore is one solution but I would caution that wage inflation is currently very high in India too.

3 - Recession in Euroland
Today, it was announced that Europe's GDP shrank 0.2% in Q2, after growing 0.7% in Q1. The German economy, Europe's largest, contracted for the first time in almost four years and France also fell by 0.3%.

"We expect the euro zone to move into an outright recession,'" said Ian Stannard of BNP Paribas. "We see a multi-year euro downtrend now developing”.

It would be incredible if the UK avoided recession if mainland Europe is suffering like this. I’ve only lived through three recessions in my working life – 1974/75, 1980/81 and 1991. As I have said above, the UK SITS sector avoided recession in those years. Firstly, because it was very small in the early years and was not ‘significant’ in the economy. Secondly, there were major tech drivers – the launch of the PC - in the early 1980s which meant that IT grew despite the economic downturn.

Now things are very different. Tech is ‘core’ and ‘significant’ to the economy. If you include all of tech – SITS, hardware, consumer tech and telecomms (fixed and mobile) – it’s c10% of UK GDP. SITS alone is c4% of GDP. If there is a general economic downturn, SITS will be affected and growth is bound to slow. However, if it offers customers real savings, it might well avoid outright recession.

4 – Anywhere to hide?
I think today’s news from the Euro zone indicates that there isn’t going to be a ‘safe haven’ anywhere in the Western World – not the UK, not the USA, not mainland Europe. So, although when Andy Green says (as he did on the Radio 4’s Today programme) that one of Logica’s strengths is that it only gets 20% of its revenues from the UK (true) it is also significantly exposed to France and Germany (both currently recording GDP declines)

Conclusion

If I can offer just one lesson learnt from previous downturns, it is that our industry always seems to ‘Live in Denial’ when faced with a slowdown. “It will not affect IT”, “It will be short-lived”, “Let’s wait until the end of the month, quarter, year before we take any cost-cutting action”.

UK SITS is facing a downturn. I think you should prepare for no growth in 2009. That means not taking on extra office space, big capital expenditure, lots of new staff etc. Look at ways of reducing your main staff costs. Layoffs are not the only solution. More flexible working (3 days rather than 5), voluntary salary cuts, more performance-related pay. Obviously contractors can be viewed in two ways. Why pay a contractor if you have permanent staff on the bench? Contractors can be very useful in avoiding permanent staff recruitment – but in today’s environment negotiate hard. Ask your existing contractors for a 25% fee rate cut or will go out for re-tender.

Tough times requires tough actions.

Ofcom publishes its annual Communications Market report

Ofcom has just published its annual review. The best short review is from Ofcom – Communication Nation – UK consumers paying less but getting more. I’m sure you will have read many articles on its findings in today’s newspapers. Eg Old habits die hard amongst multi-tasking technophiles or Net matters more than TV for the young in the FT.

As usual, I’ll bring you my views on this superb mine of tech data. But you could, of course, read all 365 pages yourself by downloading the Communications Market 2008 report. It’s free – or rather as we pay for Ofcom, you’ve paid for it already so you might as well make good use of it!

Logica shares up on positive interim results

Logica has just issued its interim results for the six months to 30th June 08 which are ahead of expectations. At the headline level, revenues were up 6% at £1525m with Op Profit up 16% at £118m and Adj. EPS up 35% at 4.0p. However, Logica says it “has seen incidences of slower spending in financial services and with some consumer-driven customers, our markets have generally remained positive in the first half”. Despite that, Logica has increased its guidance for 2008 to “revenue growth closer to 4%, compared to previous guidance of around 3%”.

Logica shares are up 9% at 122p (9.00am) on this news.

Growth returned in the UK – revenues were up 6% at £354m. Indeed UK Public Sector revenues grew 7% and now account for 57% of UK revenues. Operating profitability in the UK improved hugely from £4m to £22m; producing an operating margin of 6.3% - pretty much in line with Logica's overall operating margin of 6.7%. Energy and Utilities did well with a 16% growth but "Financial Services and IDT continue to be challenging” declining by 6% and 4% respectively.

At long last Offshore headcount is on the rise, with a net 450 added since the year end (now 3,900, about 10% of group headcount) Most of which additions were in India.

I’ll comment further when I’ve had time to absorb the full 53 pages of the release. But early impressions are positive. That doesn’t alter my views at the time of the Business Review. I still think that Logica is trying to fire on too many cylinders. It’s too ‘mid-sized generalist’. What Andy Green is doing is being the old Logica but trying to execute better. These results would indicate that he’s made some early progress. Whether it is enough is another matter.

Footnote – I heard Andy Green on the Today programme this morning when he forecast that IT Services growth would be equal to or ahead of GDP growth. As readers know, I do not buy that. I expect SITS growth in the UK to be at, or very marginally below, GDP growth for 2008 as a whole and about 4% off GDP growth in 2009. But I do think that Andy might be falling into the same mistake as many other observers. GDP is a real growth figure – ie it’s after inflation. Therefore you MUST adjust SITS growth accordingly. In other words, if inflation is 4%, then you have to knock that off headline growth to get back to a real growth figure. So, if inflation is 4% in 2009 and GDP is 1.75% (the two current projections) then headline growth has to be 5.75% just to equal GDP growth. I don’t think it will be. I think UK SITS headline growth in 2009 will be around 2% - ie a c2% decline in real terms. But, of course, if we go into recession – ie negative GDP growth - then Andy’s statements might indeed prove to be correct!!

Netstore, 2e2 and the Application Outsourcing opportuinity

Yesterday Netstore announced its long awaited agreed bid from 2e2. Long awaited because news that Netstore was in bid talks date back to Feb 08. The bid is at 32p valuing Netstore at £58m. (You can read the full announcement and more detailed background on Netstore here) In its latest interims to 30th Dec 07, Netstore made a net loss of £266,000 on revenues of £19.6m

I have an interest in Netstore which I must declare - as an adviser to and investor in the Elderstreet Capital Partners, which took a position in Netstore pre its IPO in Apr 2000, I am a Netstore shareholder (albeit indirectly) . If you remember Netstore was founded in 1995 and could claim to have pioneered the ASP concept in the UK. Maybe that was the problem! I well remember myself 'pioneering' the ASP concept back in 1995 only finding that I had to eat my words as it took far longer to take off than I had ever imagined. Like a decade longer!

The Netstore IPO in 2000 was at c130p and the price soon rose to nearly 200p. So, as you can see, Netstore has suffered rather badly since. A new CEO was appointed in 2007 which resulted in a profits warning soon after. Things got worse when, earlier this year, Netstore announced some accounting irregularities which all created an environment where a sale became the preferred route for shareholders.

Conversely, CEO Terry Burt's 2e2 is picking up a well-positioned business which meshes well with its existing operations. Indeed, this boosts 2e2's revenues from c£240m to c£280m, which would put the Duke Street Capital-backed private company up to the kind of scale required for an IPO of its own. (I note that, in George O'Connor's note this morning, CFO Simon Burt says that "2e2 has no plans to test the public market at the moment".) You may remember that 2e2 most recent acquisition was Compel in Mar 07 for c£58m.

Personally I believe that Application Outsourcing will be a big future opportunity as SME's finally embrace the SaaS model. The combination of the various existing strands to 2e2's business with the ASP capabilities of Netstore, looks pretty powerful to me!

Listen to me

I got interviewed by Mark Watts of Computer Weekly for a Podcast. It covers my views on how the credit crunch has affected the IT sector - and my views on the outlook for H2 2008 and 2009. You can Listen to it here.

My views from this interview seem to have been picked up by other sections of the media. I guess it just shows the increasing influence of HotViews and how this works 'virally'.

MessageLabs - For Sale or IPO?

The Sunday Times carries a report that Messagelabs has appointed advisers JP Morgan Cazanove and Citigroup to “consider its future”. The Sunday Times suggests that this is ahead of an IPO which could value the firm at c£400m. See £400m web fraud firm to float If this proves to be true, it would be excellent news. We need a healthy IPO market and all we have had in the last year or so (with the exception of Telecity) is UK quoted SITS companies going private. Indeed we have lost around 20% of our quoted brethren in the last year alone.

However, I’m afraid that the most likely outcome will be a trade sale. In the last year alone in this space, Google has acquired Postini for £325m and Cisco bought IronPort.

Messagelabs Views

I first visited Messagelabs at their HQ in Gloucester in 2005. I was shown their Houston-style control room with its mass of screens showing current virus threats and their spread around the world. It was mega impressive.

MessageLabs provides a fully managed messaging security service. Even if you don’t use them yourself, you will have received e-mails with the footnote “This email has been scanned by the MessageLabs Email Security System.” The e-mail security market is dominated by software solutions from Symantec, McAfee, Trend, Sophos etc. But the MessageLabs solution is based on messages going via its datacenters now on four continents. They currently have 530 staff, 18,000 clients and 7.5m end-users, 800 partners and process upwards of 1b e-mail messages a week.

MessageLabs growth has been impressive. When I went to see them in 2005 the MessageLabs bit had revenues of c£42m in the year to 30th June 05. This has grown to £72.5m in the year to 30th June 08 – up 22% in the last year alone. Profits have been more elusive – but they have now broken into the black for the first time; making £5.5m ‘operating profit’ in the year to 30th June 08. The messaging security market is pretty immune from economic slowdown – its just something you have to do whatever. IDC reckons the market is worth £1.3b and is growing by 23% pa.

Brothers Ben and Jos White formed Star back in 1995, with MessageLabs following in 1999. They have since raised £10m in 1999 from RIT Capital, Rothschild and Weinstock and a further £25m in 2000 from MDP and Catalyst. When I visited them in 20005,. Star was the ‘profit machine’ and was spun-off in an MBO, led by Ben White, in June 2007. However, the White brothers retained their stake in MessageLabs. They has already passed executive management to CEO Adrian Chamberlain in 2006. The Whites and the management team still own more than 50% of the company.

When I met Ben White he was an evangelist for the remote datacentre methodology. Even back then, he believed that “all the servers in broom cupboards throughout the land will migrate to datacentres”. Having the filter in one place does have many attractions as it can eliminate threats at the internet level before they reach corporate networks and end users.

What makes MessageLabs different from other software vendors is its combination of internet-level (or in the cloud) scanning, fully managed services and its predictive technology, Skeptic. Skeptic proactively monitors, tracks and provides protection against emerging threats before they get near the customer’s network. Skeptic learns from every message it sees, updating and evolving with every new threat. They like to see it as a utility service, much like turning a tap on and being certain to get clean, filtered water. MessageLabs just thinks that email ought to be cleaned in the system rather than at your office or home.

If my suspicion, that all this publicity will end in a trade sale rather than an IPO, is correct the buyer will likely be from the US and the UK will lose another example of a fine indigenous SITS company. Shame, but inevitable.

Miva rejects Blinkx bid

On Friday, Blinkx made a bid of $1.20 per share for US NASDAQ-quoted On Friday, Blinkx made a bid of $1.20 per share for US NASDAQ-quoted Miva – valuing them at $39m. Miva is an online advertising group which earns its money from pay-per-click advertising based around its specialist toolbars. Miva immediately rejected the offer saying that the offer undervalued the company. That was a bit rich as Miva was trading at $0.79 before the bid. Although Miva has $20m in cash on its balance sheet and revenues of $153m in year to 31st Dec 07, it really has been struggling. revenues seem to be on a long downward decline. Just $33m revenues were vrecorded in Q1 2008. Miva shares have crashed from $7.50 just a year back in Aug 07 to 79c before the bid.

This all boosted Blinkx shares which rose another 10%/3p to 32p on Friday. As I have disclosed before, I became a Blinkx shareholder at their IPO last year at 45p and have seen my investment dive rather sharply since. They reached a low of 15p in early July. I’m never quite sure how to feel in such circumstances – glee at them doubling in the last month or dismay at the 30% loss I am still carrying.

But I actually still rather like Blinkx. Last month, in the UK, they had more visitors than Google Video; attracting 5m visitors a day. They have 26m hours of video indexed and loads of partners, like the BBC, as partners. Video forms a key element of our integrated use of the internet but many people think video on the internet is ‘just’ Youtube. Blinkx gives you access to everything on Youtube - and so much more. Try searching for the Rolling Stones Brown Sugar on Blinkx and you get a massive choice (85,000 videos of them performing just that one song!) from a range of sources. (One of my favourites is the BBC’s Top of the Pops 1971 appearance with Mick in his pink satin suit.)

Miva would be a huge step, in revenue terms, as it’s 8x bigger than Blinkx. Blinkx CEO Suranga Chandratillake wants Miva for its distribution network. I’d just caution him that it breaks (in spades) Holway’s golden rule for avoiding Acquisition Indigestion.

An UnHappy Anniversary

This week marked the first anniversary of the credit crunch. The first that I knew of this came a few weeks later when I was addressing a tech dinner atop Barclay’s offices in Canary Wharf. I was told that they were having trouble laying off the debt for the Alliance Boots deal. The conversation that night was dominated not by tech issues but what this would mean for all of us.

I won’t repeat all the many reviews of the unprecedented events of the last year and the nasty situation that we now find ourselves in. But I will say that even then I was getting pretty sick of the continuous upward spiralling of house prices and how this had come to dominate both dinner party conversations and the media. I did live through the last period of house price falls in the late 1980s and knew the damage this could do. That’s why I have long believed that houses were for living in and not for investment; let alone as a substitute for a decent pension scheme. Many people I met violently disagreed and boasted of their growing ‘But to Let’ portfolios.

Falling house prices actually has advantages. For a start, we might get back to the point where young people can afford to buy a first home without recourse to the ‘Bank of Mum and Dad’. Back in 1969, my first house cost 3x my salary with no parental assistance. Now you need 7x and a big dollop of cash for a deposit . If your house is for living in, it doesn’t really matter too much what it is worth. If you want to move and trade up, the differential is in your favour as prices fall. It only really matters if you trade down – something that you need to do if you thought your house was a substitute for your pension.

Of course, what we do need is more mobility. A non existent house sale market is detrimental to mobility. Perhaps this will end the stigma of renting. Indeed, perhaps we will start building more social housing.

Before the emails start flooding in, I do fully understand the pain of negative equity. Indeed, I feel very sorry for the first time buyers who managed to get on the housing ladder in the last year and now find that their hard earned deposit/equity stake (if any) has disappeared.

But longer term, I really hope that we at long last get stable house prices. I hope that property investment will be made for rental yields rather than excessive capital gain. I hope that people will invest in productive companies rather than unproductive bricks and mortar.

Michael Page soars on bid approach

Recruitment and resourcing company, Michael Page, soared by 34% today (Tuesday) to 356p on confirmation of an unsolicited bid from Adecco - valuing Page at c£1.15b. This pushed both Hays and SThree up by c10%, although Harvey Nash was unmoved.

A month back I wrote a HotViews piece entitled IT resourcing - so what's up? So what, if anything, can we glean from the Adecco bid?

Does it mean that the market is on the cusp of a recovery? That 'green shoots' have been observed? I'd have difficulty buying that one as I've not heard the 'green shoots' observation from anybody else. Indeed, if you re-read my earlier piece, I think we are only on the first part of the downward slope. Even the nadir hasn't arrived yet.

Does Adecco spy a bargain? Michael Page was already on a higher multiple than most of its peers. If Adecco wanted bargains there are many cheaper.

Does Adecco need Michael Page? David Hancock at Morgan Stanley said that "Michael Page would give Adecco a much wanted position in professional staffing where Adecco hasunderperformed in recent years". But Hancock also said he saw few synegies with little overlap in the UK business where "rolling the two businesses together runs the risk of losing revenue to a third party with customers disrupted by the change" .

Does Adecco need the management? Steve Ingham has a good reputation as CEO of Michael Page and has done a very good job with probably the best organic growth story in the sector - as the valuation metrics show. The problem here is will he (and the rest of his management team) stay? It was an unsolicited bid afterall.

Does Adecco know what it's doing? I only say this because several readers have suggested that they don't...and that the bid is evidence of them not knowing which side is up. I must admit that my questions above don't really put my mind at rest!

On the otherhand, I do believe that this whole sector is in for another consolidation round. You may remember the last major consolidation round happened at the nadir of the last recruitment and resourcing downturn in 1993. The consolidators then turned into the best stock performers in the 1990s before the pre-Y2K downturn hit them for six again in 1998 and the whole cycle repeated itself again. Indeed Adecco bought the UK's Computer People - the leading UK ITSA at the time - in 1999 for £167m. Some would say that resourcers were at the same 'start of the downturn' point in 1999 as they are now.

My only problem is that, just like in 1999, I don't think we have yet reached the nadir.

Fidessa - right products for downturn?

I was rightly slapped on the wrist for mentioning the Fidessa's comment on earn-outs yesterday but failing to mention their rather superb results for the 6 months to 30th June. Revenues rose 40% to £85m, PBT was up from £8.2m to £21.5m and operating profits grew 37% to £11.2m.

Readers will know that it is not all gloom. Any company that can promise to cut costs with payback in a short period (like this year?) will get a hearing from any company; none more so than the hard hit trading divsions of banks which form Fidessa's core client base. It looks like Fidessa is one of those companies with the products to cut costs and improve efficiency and competitiveness.

Fidessa shares are 937p as I look - their highest for the year (just!) and up 13% YTD.

Sage continues its 'Boring' way

OK, I know I've banged on about Holway's two 'Boring Award' holders - Capita and Sage - for nearly twenty years now, but I am now convinced that Boring companies actually thrive in times of economic downturn. Last week we saw Capita report some really excellent H1 results with an equally bullish outlook statement. Today, it was Sage's turn to issue their IMS for the 9 months to 30th June 08. As CEO Paul Walker said, "Sage shows resilience in uncertain and challenging markets". Paul Pindar at Capita uses similar - maybe even more positive - words. You can read Sage's IMS in full here. It looks like all their businesses - with the exception of the US Healthcare Division which still hasn't found a CEO - have performed well and Paul Walker seems confident that they will meet analyst expectations for the year to 30th Sept 08 (Consensus is revenues £1,296m, EBITA £310m and PBT (pre-amortisation) £280m)

At first sight Capita and Sage seem to have little in common; Software v BPO, Global v UK-centric. However, other than both having a Holway Boring Award, they do have many similarities:

- long standing and experienced management.

- market leader in their respective sectors

- significant recurring contracted revenue with high predictability for the period ahead.

- excellent cash conversion.

- resilience to economic downturn. Maybe, even benefits from it.

- reluctance (and attendant high cost) of customers to change established suppliers.

- stick-to-the-knitting business model which even simple analysts can understand!

Holway's Boring Awards are all about 'boring consistency'. No surprises, just damned good performance. The fact that neither Capita or Sage has ever reported an earnings reversal since their respective IPOs in 1989 (and probably before if I had the financial record) is truly remarkable and, indeed, unique amongst any of the FTSE100 companies as far as I know. And, such Boring performance has created great rewards for shareholders too as Sage and Capita are the all-time best performers in Holway's share charts over the last 20 years.

We need Boring performers even more in the turbulent times that lie ahead.

Earn-outs?

My attention was drawn today to a statement from Fidessa "In order to allow more rapid integration of the LatentZero and Fidessa businesses, an agreement has been made to fix the 2008 contingent consideration for LatentZero at a discounted value. This allows LatentZero management to shift focus to the combined business rather then being exclusively focused on the LatentZero business".

I have witnessed many performance related earn-outs - directly (at Richard Holway Limited/Ovum, Ovum/Datamonitor, Datamonitor/Informa), via the companies where I have been a NED and indirectly via the many companies I reported upon during the last few decades. I have severe doubts if they work for the medium term benefit of the buying shareholders. If you are selling your business, an earn-out is often the best way to maximise the price paid but it is imperative that you ring fence your operation otherwise the buyer can easily mess with your company affecting your ability to produce the targets set. Of course, the opposite is true. IF the reason for the purchase is to achieve synergy with your existing business and/or to exercise tighter/better management, a performance related deal can often create barriers to this happening. The purchased company is often run purely for the short-term - why should managers care too much what happens after the targets have been met and the cash banked? Afterall, working with the purchaser often takes the eye off the ball and rarely achieves short term goals - even though this can be to the medium/long term benefit of the merged entity.

I know that my views on this are at odds to many others. So I'd welcome your views - either as comments or send me your 'not-for-publication' emails.

Share indices in July 08

July proved to be the best month of the year for UK SITS stocks. The FTSE SCS Index was up 4.55% which means that the index is now down 'just' 2.4% YTD. That compares with a 16.2% decline in the FTSE100 YTD and 12.3% decline in NASDAQ YTD. The good fortune was not repeated in the telcom arena where declines in BT and Vodafone drove both the FTSE Fixed and Mobile Indices down c8%; leading to a c30% decline YTD in both.

In the FTSE SCS Index it was BAE Systems bid which drove Detica's share price up c70% in July. But excellent performances at Autonomy (up c18%) and Misys (up c15%) also helped.

Financial Objects, nCipher and Flomerics were all helped to significant premiums because of bids. There was an excellent article in Monday's FT Techs ride out the storm which comments on the buying spree amongst UK SCS stocks concluding that about 20% of the sector has been taken off the market in the last year. Peter Rowell (executive Chairman) and Regent statistics are quoted extensively in the FT article (Note - I am a non-executive director of Regent)

As a shareholder in Blinkx, I was pleased to see their share price recovering by c70% to 28p in July - still short of the May 07 45p IPO price though.

Share indices in July 08 - Table

Anite sells Public Sector business - at last!

Wait long enough and all your predictions come about. We have certainly waited too long to bring you the news that Anite has at last found a buyer for its Public Sector business. the buyer - Surprise, Surprise - is Northgate which has been the favoured purchaser all along. Northgate is paying £54.3 in cash for a business which has revenues of £62.4m and operating profits of £5.6m in the year to Apr 08. The consideration is above expectations which has caused Anite's shares to rise 7% to 37p this morning giving Anite a valuation of £126m.

The Anite sale comes hot on the heels of considerable 'consolidation' in the UK public sector SITS sector with majors like Northgate, Civica and IBS all being acquired in the last year. Indeed, as I have said before, this just leaves IDOX and I now wouldn't give them long as a public company.

My friend George O'Connor at Panmure Gordon advises Anite "Don't Stop Now!" in its disposal programme. I agree. It ought to put its diverse portfolio up for sale (in a subtle manner of course) That's why George (like me) recoiled in horror when Anite said in its statement that it intended to use the proceeds from the Public sector business sale to provide funds for further acquisitions. Surely the last thing it now needs to do.