Just a few of the news items that took my interest in the last few days:

• There seems to be a flurry of bid news in the UK SITS sector with Northgate, NSB and Xploite all receiving offers in the last week. If anything, an economic downturn is likely to accelerate activity - particularly from trade buyers with cash (and there are quite a few of those) who have baulked at recent prices .
  
• Could the flurry of M&A be connected with the new CGT regime with buyers trying to beat the 5th Apr 08 deadline? Probably not. But this CGT issue has turned from a bad news story to a disaster. The original announcement looked ill-thought through. Anyone would think Labour hadn’t been in power for a decade and had thought it all up over a weekend on the back of a fag packet. After repeated promises to announce amendments before Xmas, Darling bottled it. Nothing short of a complete reversal will satisfy me (and many others) now. My bet would be on an announcement in the New Year that the new regime is being postponed until 2009.
  
• On the subject of M&A, I think I got my $ and £ muddled in the likely price that Microsoft paid for Multimap.It looks like they paid $50m or c£25m. Given Multimap’s £12m revenue, it looks even more of a ‘good deal ‘ for Microsoft.
  
• Whilst on the subject of Multimap, I commend you to read the Profile of Sean Phelan – Multimap’s founder - in The Times on 13th Dec 07. The REAL reason why we don’t have that many new world beating tech companies being setup in the UK anymore is, in my view, down to the UK not producing enough youngsters interesting in STEM (Science, Technology, Engineering and Mathematics) subjects. As I have written on so many occasions, the numbers studying STEM subjects - at school, A Level and university- is crashing down. Now about half that of 2000.
  
  It was not always the case. Back “in my day” STEM subjects were compulsory and, in the 1950s and 1960s, a much higher proportion of A levels were in STEM subjects. This produced the people who created the great British Tech companies of the 1960s. Remember NINE out of the TOP TEN suppliers to the UK tech market in the late 1960s were British companies. Sean Phelan (now aged 49) is a rare, more recent example. Phelan took Engineering and Computer Science at Sussex University in the 1970s where he was sponsored by MARCONI. That gave him the foundation to form Multimap in 1995.
  If we had more British students taking STEM subjects and more British technology companies sponsoring them, we would get more Multimaps. But maybe, just like the great British tech companies of the 1960s, they'd all get bought by US companies in the end anyway!
  
• Ashley Highfield, the BBC’s Director of Future Media and Technology (who addressed our (Prince’s Trust Technology Leadership Group) Summer reception, has an excellent interview in today’s FT "BBC backs better broadband to prevent digital divide". Personally I think that what the BBC (and therefore Highfield) is doing in bringing BBC material to a wider audience on the net is fantastic. As Highfield says “viewing of BBC1 by 16 to 24 yr olds has dropped quite markedly” and it is essential for the BBC’s survival that this age group is addressed. As we all know, this is the generation that prefers to get their kicks from the web – Youtube, Facebook etc. – rather than via the established media.
  
• Google has announced that it is adding blogs to its search facility. As you might expect, I think that’s a great idea! So anything I might write on the subject of, say, Northgate will now appear in a standard Google search. You had to navigate to Google’s "Search Blogs" page before. This can only increase the importance of blogs to mainstream companies. Problem is, of course, that many (most?) blogs are ….well, let’s just say ‘not up to the standard that Holway’s HotViews aspires to”.

As a very regular user of Multimap, I was interested to read in the FT today and on StrategyEye that they have been acquired by Microsoft UK. Good move!

The FT suggests a price of £50m for the £12m revenue company - which, I suppose, is quite modest given other recent similar deals.

Yesterday Northgate Information Solutions announced that it had received another Private Equity backed bid approach which they 'hoped' would be for around 100p per share/£580m.

You can read more in today's FT article. Click here.

Readers might have a feeling of deja vu. It was only a year back - in Oct 06 - that Northgate had a similar PE-backed bid. At that time Northgate's shares were 95p and (to quote the FT of 4th Oct 06) "Bridgewell thought a bid price of up to 115p was "justifiable and accordingly we retain our overweight stance. ""

How different now. Earlier yesterday "Northgate shares had dropped by a fifth to a four year low of 46.5p after bearish notes by Morgan Stanley and Numis earlier in the day". After the inevitable bid-induced rally Northgate closed at 71p - a far cry from the 100p bid target and, indeed, the realistic hopes of just a year back.

It's all down to debt. After the £250m Arinso purchase, Northgate has net debt of £415m. That's not a comfortable place to be in the 'credit crunch' markets of today.

Having said that, we have admiration for what Chris Stone has done with Northgate. He told me several years ago that his ambition was to take Northgate into the FTSE100. He's still a long, long way off that, but he did 'go for it'. Something that few other UK SITS companies seem willing to do nowadays. Whatever happens to Northgate, Stone should have a very bright future.

Regular readers will be aware of my many pieces questioning how robust consumer tech will be in an economic downturn. I described this as the "Beer Syndrome". Ie if you couldn't afford to go out you would stay at home, drink beer and play with your gadgets. (The theory only works in a mild downturn. If it is steep, maybe you don't have a home anymore to go home to)

Anyway, Sir Howard Stringer - CEO at Sony - clearly sings from a similar hymn book. Today he was quoted in The Times saying:

"I don't know why consumer electronics are holding up so well at the moment, but in the Great Depression, it was entertainment that held on during that period. Shirley Temple was the solution to the Great Depression at the creative level".

So maybe the iPhone, the Wii or, in the case of Sony, the Playstation3, will be our very own Shirley Temples entertaining us whilst everything else in our lives fall apart.

What a gloomy thought!

12th December 07
Software & IT Services commentary

I work on the basis that if other analysts are going to quote me,  then I'm sure they will be happy for me to quote them!

On Monday, George O'Connor from Panmore Gordon presented his outlook statement for the software and IT services sector. 

"After five years of sequential growth, IT spending growth is set to fall in 2008 to a more modest rate between 3% and 6%. So, conclude industry analysts AMR , IDC and industry luminary Mr Richard Holway. Gartner sees growth at 5.5% down from 8% in 2007E. We note: (1) product cycles are typically stronger than the economic cycle – so we are relaxed about the prospects for well-placed product companies like Autonomy, Aveva, Fidessa, Micro Focus and Innovation. (2) the tussle between discretionary and non-discretionary IT spend remains unclear and this will throw up surprises in the coming months. Lower spending increases forecast risk, but at 14.3x P/E the market is discounting much of this already. Investors looking for high alpha and low-cost beta should in our view stick with the Elites".

For the much longer, pdf version, click here

Ian Spence in Megabutye today, however, concludes that "we continue to believe that, as financial services contagion continues to spread that the 12-24 month outlook for the sector is poor and that 2008 will be a very tough year for the sector".

As readers know, I too am 'gloomy' towards the outlook for the economy (in the US and UK in particular because of their respective high debt and reliance on the 'feel good' factor of rising house prices), for IT (where I fear a downturn in consumer tech spend after Christmas to add to a gloomy 'enterprise' spend outlook in particular in the previously high growth areas of Public Sector and Financial Services) and for tech shares (the market currently is so illiquid that a small sell order can send the shares crashing).

I really don't buy the P/E story. What other non growth or declining sectors command 14+ P/Es?  Sub 10 seems about right to me! Of course, there will be exceptions. As ever, it is spotting the "above average" exceptions that will be key. "Average really isn't good enough anymore". But I think I have made that comment many times in since 2000.

If you want to see who came to the Prince's Trust Technology Leadership Group Winter Reception on 6th December and/or Tony Hallett's (excellent!) write-up of my speech (he must have been listening!) Click here. 

Tonight is the Prince’s Trust Technology Leadership Group’s Winter Reception at the magnificent Wallace Collection. Bob Gogel and Peter Rowell from sponsors Liberata and Regent Associates are also presenting. Bob on how Liberata works with the Prince’s Trust and Peter on his “Ten things you will do tomorrow that you are not doing today”. I look forward to them both. Indeed I look forward to meeting many HotViews readers there. It is certainly an excellent representation of the UK tech scene today with a sprinkling of knights and Ladies too!

My (brief) talk basically brings together two of the themes I introduced back in my first Prince’s Trust speeches in 2002/2003.

The first was Holway’s Martini Moment – the ability to access the internet “Any time, Any where and from Any device”. The term has been much copied since – but I was the first to use it! I used the ability to listen to The Archers as my “Martini Moment Test” and rather enjoyed the groans this always get from audiences! But remember, in 2002 when I first introduced it, there wasn’t even a Listen Again feature on the BBC website.

The second was the progression from Desktop to Webtop as in my “I used to drive a Microsoft, now I fly a Google” speech.

In my last speech, I progressed still further from Desktop to Webtop to MyTop. I used Facebook as an example of the kind of portal which some people might prefer to use as their access to the web. MyTop would gather your contacts, your applications, your work documents, your music, your entertainment into one portal which was personal to you. You can read my MyTop thoughts here.

MobiTop brings these two themes together. Now freed from your fixed place of access, MobiTop is your personalised portal on your home PC, your work PC, on your laptop, on your iPhone, at an internet café etc. No more synchronising of data, contacts and preferences. No more applications on just one PC.

Unfortunately this is still a “Tomorrow”-type dream. You need really fast, reliable and secure internet access from (practically) every place on earth to make this work effectively. But given the progress we have already made in achieving Holway’s Martini Moment, I would expect that to be achieved within the next five years.

See you tonight

Although widely trailed, it was announced last night that Ron Rittenmeyer was to take over as Chairman and CEO of EDS from Mike Jordan who becomes “Chairman Emeritus” and will step down from the board on 31st Dec 07.

Jordan has turned 71 so probably deserves more time to practice his golf and write more books. Rittenmeyer is no spring chicken either – having just turned 60. So there is hope for me yet!

When Jordan took the EDS helm in March 2003, it was a company in serious crisis. The US Navy contract was haemorrhaging $1billion a year. In the UK, EDS thought they would never win another UK Govt contract – having just lost their prestigious Inland Revenue contract to Capgemini. Morale was at rock bottom and you got a sense of open internal warfare. This all contributed to old customers jumping ship and new ones staying well away.

EDS is undoubtedly a rather different company now. Indeed, not only have the US Navy problems been fixed but a new contract awarded.

But the “Mission Accomplished” sign can hardly be nailed to the front of EDS’ Dallas HQ. Jordan had a $30 share price target when he took over (it was $15 then). EDS still languishes at <$20. Results announced on 1st Aug 07 showed orders down 20% in the quarter. EDS faces a quite different world even than in 2003. The Indians are now very serious competitors for the very type of IT infrastructure work that is EDS bread and butter. The outlook for the economies in its main US and European markets look problematic – and now that includes the Public sector outlook too.

Let’s credit Jordan with reasonable marks for “EDS – The Revival” Chapter One. Rittenmeyer still has much work to do in Chapter Two.

Throughout the last year on HotViews, I have given one warning over and over again. I’ve said that growth in Enterprise IT spend (hardware, software and IT services) is modest already and, with the current financial services crisis, will evaporate completely (in real terms). I see no recovery before 2009 at the earliest.

But what has been driving tech for the last years is consumer tech. Not just Apple and the iPod or Nintendo and the Wii, but everything that surrounds, supports and carries such consumer tech. Cisco would be a good example here.

If consumers stop buying tech, our industry is in for a seriously bad time.

Throughout the year, I have carried a debate about “Tech – the safe haven in a gathering storm”. I even extended this with the “Beer Syndrome”. The view here is that even if consumers tighten their belts, that will just mean that they stay at home more, drink more beer and play with their gadgets. But that assumes that the downturn is ‘modest’ and, indeed, that those consumers have a home to go home to. If the downturn is really steep, consumers would give up the gadgets too.

One of the first real indications of that came from Dell last week. Dell sees emerging markets and consumers as its two target areas (understandable if you consider the enterprise problems in the ‘old word’ and the huge growth rate differences between the old and new economies)

Dell’s Q3 results last week were actually quite good but their outlook statement shocked investors who marked Dell shares down 15% in the four days since. The headline worry was about costs – basically Dell said that margins would suffer as they addressed their well known infrastructure problems. But, to me the indicator that gave the most concern was that Dell’s revenues from their US Consumer business declined by 6% in the quarter. As George O'Connor from Panmore Gordon said in his newsletter yesterday "Dell reflects the consumer market but this is falling on deaf ears."

The evidence that consumer confidence – in the US AND UK – is shot to pieces seems to come to me in droves. Whether it is front page newspaper articles on the slump in new mortgages, sales in Starbucks and restaurants in general or even the intriguing "Sofa" bellweather. Thanks to HotViews readers, I’ve been sent many other newsletters expounding the consumer confidence downturn.

But still there is a view that “Tech will be a safe haven in the gathering storm”. Somehow, however bad it gets, we will still buy iPhones, new laptops and Wiis. That, in turn, will feed the need for new Cisco kit and advertisers will still flood to Google.

I increasingly feel that’s “head in the sand” wishful thinking

Do you remember March 2000? Depending whether it was the UK or the US, March 6th 2000 or March 9th 2000 are generally accepted as the Day the Dot.com Bubble Burst.

When I came to compile my monthly statistics for March 00 for the April 2000 edition of SYSTEMHOUSE, I reported that the FTSE SCS Index had fallen by 16.09% to 4134.

I was very close claiming that this record fall had been beaten in Nov 07. A last minute rally meant that the FTSE SCS Index fell by 15.9% in Nov 07.

Everyone thinks that the dot com bubble burst with a bang and “that was it”. But what happened was tech indices fell in March 2000 – and then just kept falling EVERY month. From a high of 5000 in early Mar 00, the FTSE SCS Index ended 2000 down 50% on the year at 1949. Then it fell another 56% to 844 by the end of 2001 and another 60% to 340 by the end of 2002 when the long, slow recovery commenced. Remember it closed Nov 07 at 530 – still roughly only 10% of its peak. The Techmark 100, which hit a peak of 5200 back in March 00 is still 70% down at 1621. Conversely, the FTSE100 is roughly the same (6432 now/6232 end Mar 00)

Paxman and Holway’s forecasts

Back in February 2000, I had been quizzed at the Regent Conference by the grand inquisitor, Jeremy Paxman. I’d been pressed into making a prediction that tech indices would be 60% lower by end 2000. (If you don’t believe me, please reread SYSTEMHOUSE April 2000) I explained this as “a return to sanity”. Sage, back then, was trading on an historic P/E of 168 and a PSR of 30! Today Sage trades on an historic P/E of 20 and a PSR of 3.3. (and their share price is 215p as compared to the £10 it hit in Mar 00)

In other words, valuations now are back in the realms of sanity. But that doesn’t mean that I don’t believe the tech markets will continue to fall. A 5-10% share price erosion month after month could easily knock another 30% off the FTSE SCS index by May next 2008. My guts tell me that is likely to be the nadir this time around.

Tech shares November 2007

The Share Indices table for Nov 07 is presented below. An awful month all round for tech. Actually the UK suffered more the US (where NASDAQ fell by 7% compared with an 8% fall in the Techmark 100) and Europe. UK SCS (down 15.9% - see above) was hit worse than Telecomm (down 5.3%) with Fixed line telcomm down 10.5%. Even Support services (where BPO players like Capita and the ITSAs are listed) fell 9%.

Axon (see post last week) was the worst hit individual SCS stock with a 35% fall. Vega was the best – up 34% at 280p after receiving a bid at that price from Italian defence and aerospace group Finneccanica.

3rd Dec 07 07 
Share Indices for Nov 07