BT has released its Q1 (to 30th June 08) results which sent their shares diving (down 11% at 175p as I write). This was because a straight 4th consecutive quarterly profit decrease and a warning of profit margin pressure at BT Global Services. See BT slumps most in eight years from Bloomberg.

Revenues from BT Global Services increased by 13% year on year (or around 8% in constant currency) to £2.05b; the highest quarterly growth for over two years. This was driven by strong performance outside the UK, where revenue growth accelerated to 33%. However, these figures include acquisitions (of which BT GS has made quite a few). I'll try to get the organic results for you if possible. Of BT GS's £2.05b Q1 revenues, 46% or £952m relates to Networked IT Services - the closest BT Global Services gets in its breakdown to what we would call IT Services (the rest is line and circuit charges etc.) This segment grew 15% (c10% in constant currency - less organically). Total orders increased by 12% to £1.9b which included a seven-year outsourcing deal with Nationwide Building Society to manage its networked IT services and a five-year contract worth $650m with Procter & Gamble (P&G) to provide and manage P&G's local and wide area network infrastructure across more than 1,100 locations in more than 82 countries.

BT says it "expects to see continued strong revenue growth in BT Global Services but EBITDA margins may fall slightly in 2008/9 in part due to currency movements. However, we remain committed to achieving the 15% EBITDA margin target".

Capgemini has also come up with some pretty 'solid' results for H1 and Q2. Organic growth at constant currency was 5.3% in H1 (Euro4.37b). Of course, unlike its US competitors, the results at current exchange rates are rather different - minus 0.5%. Capgemini UK produced the lowest growth (+1.5%) "to compensate for the programmed drop in revenues from HMRC".

Interestingly it was Local Professional Services via Sogeti (what was called 'body-shopping' for most of my time and was the original bedrock of Capgemini) which recorded the highest growth rate (+11.5%) . conversely, outsourcing was the worst performer - up just 3.2% (although HMRC had an adverse affect here). This rather goes against Holway's gut feelings that the ITSA-type revenues are being hard hit but outsourcing is benefitting from the econimic environment.

Capgemini is now forecasting overall revenue growth between 4% and 5% for 2008.

We have now got the latest results from all the major IT Services players in Europe and they look pretty good ('solid' is the word most often used!) I've done a quick-and-dirty analysis of the European IT Services revenues announced by the biggies - IBM Global Services, EDS, Accenture, CSC, Capgemini, BT Global Services, Capita, Logica, Atos Origin. (Note - Fujitsu Services makes up the remaining company in the Top Ten. They are due to release results today but have indicated "strong growth in the IT services business" in the press statement put out a few minutes ago)

Considering the activist shareholder fighting at Atos Origin earlier this year, the management could be excused if the results were dire. Afterall peace broke out only in May 08. But Atos Origin’s H1 results are really quite good. Atos described them as ‘solid’ – the same word used by EDS to describe their results yesterday. Atos Origin recorded an organic growth of 6.3% to Euro2.745b with profits doubled to Euro125m.

The UK, under CEO Keith Wilman, did even better with a 12% revenue increase to £376 for the first 6 months of 2008. The outlook looks pretty encouraging too with the sales pipeline up 50%. The recipe for the turnaround (as always) was simple. Focus. Central Government (eg Ministry of Justice, Police), Transport (Alstom, National Express), Healthcare (NHS Scotland, DWP, MoD) as well as private sector work in Enterprise (Britvic, Theshers, Warburtons) and Financial Services (Capita, Liverpool & Victoria).

Very good review by my (ex) colleague Phil Codling at Ovum Atos Origin fires on more cylinders.

My old friends still at Ovum must be getting a bit confused about who their ultimate owners are or might be. Earlier this month I reported on Informa getting a bid from a private equity consortium headed by Providence. There are now reports that Blackstone has teamed up with a Dubai sovereign wealth fund to make a rival bid – after Hellman & Friedman ‘allegedly’ walked away from the Providence consortia.

Intriguingly, the FT says that the new Blackstone bid will breakup the group “seeking trade buyers for such elements as Datamonitor” (which owns Ovum). See Blackstone swoops on Informa in today’s FT. Perhaps I should prepare a bid for take out Ovum? Put into perspective though, the ‘old’ Ovum is currently less than 2% of Informa’s revenues. A mere irrelevance!

Earlier this week Informa reported a 32% fall in PBT; mainly attributed to the high amortisation costs related to the purchase of Datamonitor in 2007. Informa shares had halved (from c600p at the time of the Datamonitor deal to c300p in March 2008) before the bid speculation started. They closed yesterday at 437p.

I see my friend, JP Rangaswami, managing director of service design at BT, is behind their acquisition of Ribbit for $105m. See the FT’s Ribbit’s smart switch to BT. "Ribbit’s key technology is a “SmartSwitch” that handles the complexities of mobile, fixed and internet telephony, allowing developers to master just a few simple commands to bring voice to any web page or web application". BT says Ribbit helps in its strategy to become ‘a next-generation, platform-based, software-driven, services company’. (Ed - This contains far too many hyphens to make much sense to me!)

If the aim in this is for BT to build an ‘open systems’ development environment to rival Apple’s or Google’s (or Microsoft’s or Symbian’s) mobile operating environments, I think they have a really tough task ahead.

In my article Detica and BAE Systems yesterday I might have given the impression that CEO Tom Black had been at the firm since the very start in 1977. He joined in 1984 – but 24 years is a pretty good innings anyway. Indeed, to me as an analyst, Tom Black has always been synonymous with Detica.

But, actually, that’s not quite true either! Detica was known as the Smith Group until 2001. I well remember the fanfare of them changing their name to idetica (very good name for a security company!) but had to pull the name change at the last minute as there was another company with a similar name (identica). That was all ahead of the 2002 IPO at 80p. Monday’s bid from BAE Systems was at 440p – a 400% increase. Pretty good in anyone’s books. Tom Black will make £24.5m on the sale of his stake and will, I understand, stay on post the deal.

The interesting thing about EDS' Q2 results was not what was contained in the headlines of the EDS press release or the many reviews of their results in the media. From those you would guess that a 22% rise in EPS and a 27% rise in contracts signed (at $5.4b) signalled a company in a high growth sector. Ron Rittenmeyer, EDS chairman, president and CEO described this as “a very solid performance". I suppose that is one way to describe the mere 3% revenue growth which reduces to a 2% decline if you strip out acquisitions and currency fluctuations. In EMEA, the growth was 3% - although I suspect that too would have been negative too if currency fluctuations were excluded.

BAE Systems has confirmed its bid for Detica. See BAE Systems identified as Detica bidder. It's at 440p which values Detica at £531m. That equates to a 57% premium to the closing price before the possibility of a bid was announced on 17th July. That's a 26 P/E to current year expectations.

In September, I am giving my major annual 'State of the ICT Nation' speech for the Prince's Trust (and atop BT Tower as before). It's entitled Revolution and one of the themes is what I perceive as a growing Generation Gap as evidenced by those that 'get' social networking (ie Facebook) and those that don't. Indeed I've given you many examples of the corporate use of social networking on HotViews on many occasions in the last few years.

My involvement with Vin Murria came about through Elderstreet where she is a Director and I am an adviser to one of their funds. Indeed, our investment in Computer Software Group (CSG) – where Michael Jackson served as Chairman and Vin Murria as CEO - was the most successful for the fund when it was sold to HG Capital in March 2007 for c£100m. CSG was a consolidation play in the legal, not-for-profit, membership arena – and it worked very well for shareholders. Jackson and Murria stayed with the new entity which merged with Iris and was then sold to Helman & Friedman for c£500m – in hindsight, probably at the top of the market!

Well, now the duo are at it again. This time in the UK primary care arena. Via an AIM ‘shell’ called Drury Lane Capital plc, they have acquired (actually it’s a reverse takeover) Adastra for £12.2m (£4.8m in cash, rest in shares). Drury Lane (which I understand will change its name to Advanced Computer Software plc when the deal is consummated) is raising £14.6m by way of a placing of 86m shares at 17p.

Adastra was setup in 1994 by Lynn Woods and James Berry (both of whom will continue post the acquisition). In 2002 they acquired their main competitor, Owl Software. In the year to 29th Feb 08 Adastra had revenues of £10.6m, PBT of £1.7m and 150 staff. A significant majority (>70%) of revenues comes from recurring support revenue and from software sales to existing clients. Adastra’s main product is a specialist call management, data distribution and clinical recording systems for GP out-of-hours or urgent care. Adastra has more than doubled its revenues in the last five years.

Adastra has an almost clean sweep of out-of-hours systems in the UK with no direct competition.
What next?

If ever there was a UK market ripe for consolidation it is the Out of Hospital Care area (which goes under the acronym OoH)

Firstly, there are a whole array of relatively small companies who service the area. For example, EMIS (revenues c£50m) is one of the main suppliers of primary care/GP systems but partners with Adastra on out-of-hours. There has been speculation in the past that EMIS might itself purchase Adastra – maybe it will be the other way around now!

Secondly, the benefits of ‘cross-selling’, which would accrue if the group was enlarged, are obvious. Don’t just think doctors – think dentists, opticians, pharmacists, walk-in-centres, polyclinics (the latest DoH buzzword) etc

Thirdly, the current disarray in the NHS IT Programme might play well with a consolidation exercise. The NHS has recently given greater flexibility for local trusts to work with local suppliers of their choice. This can only benefit the smaller established suppliers over the last remaining LSPs (BT and CSC).

Lastly, users of such systems are very loyal. Training and implementation costs are high so users only change as a last resort. That means that recurring revenues are both secure and significant – exactly the kind of model of businesses that work in a consolidation play.

Xpertise has bought Parity Training Ltd for £4.8m cash. Xpertise has placed 3.25m shares at 70p to raise £2.3m. Parity Training had revenues of £18.6m and operating profits of £570K in the year to 30th Dec 07. Parity's house brokers Arbuthnot Securities - commented "We believe that this is an excellent price, given its relatively low profitability".

Parity will be focused on its two main divisions, Resources and Solutions. “These businesses have traded in line with management's expectations. Resources has continued to see strong demand with gross margin rates continuing to improve over the same period in the prior year. In addition, Resources has performed strongly in the public sector through the Catalist framework, having grown its public sector revenue by over 10%. in the year to date, driven by 28 new public client wins this year including the Land Registry and the Ministry of Defence”
Solutions, has seen some delays in the first quarter of 2008 but has recently seen some improvement as illustrated by the five year extension to the framework agreement with the Charity Commission.

Parity shares have rebounded (they had halved YTD) – up 13% as I write – as the long anticipated sale was a relief. Arbuthnot commented "Given the low market cap and the significant reduction in net debt, we believe that Parity looks extremely undervalued. The revised earnings are now derived from a higher quality and more focused group".

Not only did I recently give you my views on this sector in IT resourcing – What’s up? But Parity’s CEO – Alwyn Welch – gave us the benefit of his views on the market. Well worth reading in the context of today’s announcement.

As I have oft said, it isn’t 2008 results from the ITSAs that really worry me – it’s 2009.

I won't burden you with a repeat of Vodafone's results announced yesterday which sent their share price down 14%. You can read it all in the FT - Sarin bows out from Vodafone with a warning.

ITSA SThree's results for the half year were pretty good...considering. Revenues grew 23% to £295.4 with a 14% increase in PBT. The main part of the growth came from outside the UK. The UK represents over 60% of SThree's revenues but grew by a more modesr 8%. CEO Russell Clements said he was nervious about the mid term prospects for the sector but that the banking recruitment sector was the only area currently suffering significantly from the UK's economic downturn.

This kind of result and outlook statement is pretty much as anticipated in my earlier post IT resourcing - So what's up. My theme is taken up by the Questor column in today's Telegraph - A tough job making money as downturn threatens recruitment sector. As I said before, I have few doubts that the ITSAs will make 2008 forecasts - but it's what the ITSA Barometer is telling me for 2009 that scares me.

Last night, Apple announced its Q2 results. See Apple sets off a share slide in Businessweek or Apple hit by concerns over margins in the FT.

Basically Apple did thumpingly well in Q2; exceeding all expectations. The problem was that they warned, not on forward sales, but on forward margins. They would fall from 34.5% in Q2 to 30% in 2009. Apple never gives details on future products but gave strong hints that they would reduce prices in order to take advantage of their stellar increase in market share. According to Gartner, Apple now has a 8.5% of the US PC market putting them in the Number 3 position after HP and Dell. Separately I read that sales of laptops would exceed desktop sales for the first time in 2008. So the Apple product to focus on for price cuts is the Macbook.

The other subject which is spooking investors is God Steve Jobs’ health. You may remember that he had pancreatic cancer in 2004 and has been looking pretty pale and gaunt recently. At the moment I can’t think of any major tech company which is so identified with one single person. Microsoft seems pretty successfully to have transitioned away from Bill Gates. Google, IBM and the other majors really don’t have that “this company is dependent on one guy” tag. There is clearly a great team at Apple but it sort of feels like Freddie Mercury and Queen. Whether it’s a Queen concert at Wembley or a new Apple launch, we all know who we are really going to see, who will be the main showman. I hesitate to contemplate what would happen to Apple’s prospects – and its share price – if something serious happened to Steve.

I do commend you to read Kashflow turns down approach from former Sage Chairman on AccountingWeb. I’ve been involved in this in a number of ways and could have written this story myself several months ago but I don’t breach confidences in that way!

Kashflow is a super little company founded with financial help and mentoring from the Prince’s Trust. Duane Jackson, its founder, has had a pretty troubled background – exactly the kind of person that the Prince’s Trust attempts to help. Think Sage on SaaS on very small businesses and you get Kashflow. Duane and Kashflow have been featured at a number of Prince’s Trust Technology Leadership Group (where I was one of the founders and now its Chairman) events. Lord Young, who has done so much to help our group, became a mentor and investor in Kashflow. Alistair Darling suggested that he sells a copy to the Treasury as they clearly needed to get cashflow under control (Yep, this was as close as Darling got to a joke – except it turned out to be true and therefore wasn’t very funny). Jackson got several name checks by Prince Charles at the Windsor Castle bash on 2nd July. Duane managed to get his product under the nose of Bill Gates (see Bill Gates praises Kashflow founder) at another Prince’s Trust event where we’d invited Michael Jackson (ex-Chairman of Sage and Chairman of Elderstreet) . How many small startups get that kind of exposure?

Anyway, as a direct result of this, it looks as if Michael Jackson offered to buy Kashflow for £1m to act as the heart of a new SaaS venture he was planning. Jackson turned him down.

I’m sure that this will not be the last time I report on Kashflow. Jackson has become a great ambassador for what the Prince’s Trust can do. Maybe he’ll share some of the gains when he eventually sells

Couldn’t ignore Autonomy’s results yesterday. It just keeps exceeding expectations and its Q2 results were no exception. But even Mike Lynch is now warning about the future. See Autonomy prepares for smaller deals and ‘harsh conditions’ in today’s FT. Having said that Lynch hasn’t so far seen any downturn in his business and expects smaller deals to make up for a forecast downturn in the larger deals that Autonomy has seemed to announce almost daily in the last year.

Autonomy shares are up 15% this YTD against a falling market. They are now on some pretty heady forward multiples which might start to worry investors.

After all the gloom I’ve brought you this year to date, last week was (amazingly) the best this year. The FTSE SCS Index was up 11% which, and this is the really interesting bit, almost eradicates the losses YTD. The FTSE SCS Index is down ‘just’ 3.7% YTD compared with a massive 16.8% fall for the FTSE100.

Because of the way the FTSE SCS Index works, it’s share price moves in the larger stocks that makes the biggest difference. Bids had a great effect – so nCipher and Detica (see below) were major contributors. But also share price increases this week from the likes of Autonomy, Computacenter, Logica, Misys – which were due to performance (or rather outlook) - also played a big part.

After the markets closed on Friday, Detica put out an RNS statement saying that it had received a bid approach. This was occasioned by a 22p rise in Detica’s share price on Friday; valuing them at £351m. Indeed they are up 16% on the week which rather infers that someone must have known about this bid situation.

On Saturday, the FT identified BAE Systems as the bidder- BAE’s informal offer for Detica could spark bids. It was also suggested that this would flush out other bidders with Finmeccanica named as one. I can think of a few other majors who would be interested in this rare example of a successful, independent, mid-sized UK SCS player.

In my view, Detica is a fine company and I’ve always had a healthy respect for its CEO and founder – Tom Black. Indeed he came within a whisker of getting the Holway Boring Award he so clearly coveted, just a couple of years back. You can re-read my 2nd June 08 report – Detica – a game of two halves. My views have not changed in the intervening weeks

It looks as if the great Indian IT offshoring machine is starting to suffer from the economic downturn. Both Wipro and Satyam last week put out warnings. See The Times 18th July 08 – Wipro and Satyam warn on sales. Growth seems to have slumped to the ‘low single-digit’ level. Now most IT services companies have learned to live with such growth for years now. But it must come as quite a shock to companies used to 30%+ pa growth.

Indian IT services companies are particularly dependent on the US (and to a smaller extent the UK) markets – both of which are suffering. In addition, off-shoring has been embraced particularly by the financial services sector – again badly effect by the downturn.

The Times on Saturday carried a report – Google UK not immune to economic downturn. Google's UK Q2 revenues suffered its first decline since its 2004 IPO – down from £405.9m in Q1 to £392.4m. The problems in the property market were blamed as estate agents cut advertising spending.

The slowdown in the Indian IT services marketplace (see above) didn’t seem to affect HCL M&A activities. Last week the bought Liberata’s financial services (Life & Pensions) operations. My ex-colleague at Ovum – Peter Clarke – wrote a good piece on this - Liberata sells financial services business to HCL – so I won’t repeat his points.

Most of you are aware of my interest in disadvantaged young people and, because of that, my Chairmanship of the Prince’s Trust Technology Leadership Group. Today, research from the LSE shows that the proportion of 16-17 year-olds in the UK not in education, employment or training (commonly called NEETs) is not the 7% HM Govt reckons, but 18%. Put another way, one-in-five 16-17 year-olds is busy doing nothing all day. See BBC News report

Last night several of the important global tech bellwethers reported quarterly results to 30th June 08.

Rather than repeating these results you can read the FT or Businessweek reports here:

- Nokia’s sales buck fears of slowdown
- IBM shrugs off global concerns
- Microsoft dips 5% despite sales increase
- Google Weathering the economy?

Essentially, so far as reported quarterly results are concerned, all the companies are roughly meeting expectations and all showed double-digit sales growth (albeit that a goodly proportion of this revenue growth came from the ‘positive’ effects of currency conversion because of a declining dollar).

It was the outlook statements which were studied even more closely than the actual results. Here there was more variation.

Nokia was decidedly upbeat; estimating an overall 10% increase in mobile devices in 2008 to c1.25billion and for Nokia to increase its share of this market from its current 40%.

IBM too was upbeat with strong sales in Europe and emerging markets like India. IBM has really moved to position itself well for any economic downturn with 50% of its revenues now coming from long-term services contracts. (Still short of Capita – but nobody’s perfect)

Microsoft, however, forecast Q1 revenues (to end Sept 08) of $14.7-$14.9 billion – somewhat short of analyst expectations. They also recorded costs rising somewhat faster than expected. This all spooked the market with Microsoft shares falling 6.5% in after-market trading.

Google also fell short of analyst expectations which caused an 8% drop in their share price. Readers might find that amazing given that Google reported a 42% increase in net revenues to $3.87billion! Analysts seemed spooked that Google had slowed its hirings. Was this because of fears of a consumer advertising slowdown?

So, as I said at the start of this piece, companies are really still reporting some rather fine results right now. It’s the future that is spooking people. As my friend George O’Connor at Panmure Gordon said in his note this morning “Although tech is a cyclical and ‘beta’ sector in the real economy it is late cycle. In the main, tech spending is sticky –with c80% being geared to keeping the existing fabric of companies intact (a flowery way for saying maintenance and support) as a consequence investors should prepare for bad news next year not this year – yes we will be downgrading earnings estimates – but not yet.”

This is a theme I have expounded before – for example in my IT resourcing – What’s up? article last week. 2008 expectations are probably pretty sound for most of the majors – it’s 2009 that worries the daylights out of me

Many years ago, I introduced the “ITSAs are the Barometer of the IT market” concept. Through every previous IT cycle, ITSAs had behaved roughly as follows:

- IT market is great. IT contractors and permanent recruitment in great demand. ITSAs thrive.

- IT market turns down. IT contractors are the first to get ‘let go’. Contractors reduce rates and many apply for permanent roles. Permanent staff turnover falls. ITSAs the first to suffer.

- IT markets get really rough. Permanent jobs go. ITSAs find life really tough.

- First signs of recovery. Firms take on IT contractors first – fearful that the recovery will not last.

- Recovery strengthens. Permanent jobs are in demand not least because churn increases as confidence returns.

I think I’ve been through this cycle at least three times in my time as an analyst. The ‘problem’ is that each time the ITSAs tell me that it’s ‘different this time…”.

So far this year, if you take stock prices as an indicator, you would conclude that the ITSAs are having a tough time. Although fully recognising that all these companies are different and, indeed, engage in the IT bit of resourcing to varying degrees, Michael Page, Hays and SThree have declined by 23%, 30% and 36% respectively this year. Parity and Harvey Nash have both slumped by over 50%.

The ‘problem’ is that these companies have actually performed according to expectations so far this year and there haven’t been any revisions for 2008 as a whole. The share price falls are therefore mainly based on the outlook for 2009. Basically, the market just doesn’t believe the current 2009 earnings estimates and companies don’t have to issue warnings that far in advance!

So what is happening?

There is no question that overall the recruitment market is tightening. Latest data (Source – KPMG) shows that demand in permanent placements (all sectors) fell in June for the first time in 5 years, whilst demand for temporary placements, whilst still growing, was at the lowest level of growth for 2 years. In IT, strangely and against the cycle I outlined above, permanent recruitment is still growing whilst temp recruitment is shrinking a little.

I am also told that it is getting more difficult to pull people out of existing employers (nervousness about being somewhere new when times get tough) and that senior level headhunts are scarce at present (cautiousness about changes in senior management – that will probably change as companies hit problems)!

In IT, I still believe there is good demand in some technologies and in the more senior roles (driven by offshoring and technology changes for systems development and maintenance/support). Recruitment in some areas (project and programme managers, service managers, analysts, system architects etc.) is still doing fine. Clients are trying to apply pressure on prices and margins, but with mixed results. Public sector still seems very strong.

So I invited the CEOs of two of the resourcing companies, whose shares have been the worst affected, to give me their views.

I wouldn’t want to be a generalist (in anything) in a downturn: likely to be selling on wafer-thin margins and with a high exposure to low level (offshorable, automatable) skills.

Why is the whole recruitment sector getting hammered by the analysts/investor

There’s been a lot of speculation over when the downturn will affect recruitment companies. It’s fascinating to watch analysts cut this year’s earnings forecasts only to be wrong-footed by better than expected performances from the quality players.

In the USA, notwithstanding the slowdown over the last twelve months, the impact on quality recruitment groups with global exposure has not been as severe as most feared, in fact our own experience in that market has positively surprised investors as they were fearing the worst.

Some time ago I wrote on my blog http://journal.harveynash.com/ceo/ that inflation and the economic climate would increase turnover of staff and make it more difficult to retain top talent. I put forward my personal view that low unemployment, growth in emerging markets (in other words, globalization) and the increased mobility of professional skills and talent will continue to feed the employment market. Baby boomers are retiring or starting to take it easy, portfolio careers are in fashion and travelling the world on a fifty-something career break is all the rage right now. 50 is the new 40. Politicians are waking up to the challenge of attracting highly skilled people from around the globe. Australia led the way in the last decade and Europe is introducing a similar system.

The impact on remuneration and wages cannot be underestimated. Experienced management is getting scarcer, see how many young professionals are being recruited as CEOs for FTSE 100 companies. A generational change is occurring in every area of professional life. BT, Glaxo and BP are recent examples. Barack Obama represents the new generation of politicians, very Generation X and almost Generation Y. Then there is the inflation issue which is also putting pressure on disposable income, another driver of wage inflation and employee churn.

So it comes as no surprise that despite the economic downturn, UK employers are still experiencing difficulties in recruiting and retaining staff. A recent survey reported that workers are shunning company loyalty in favor of high pay. Apparently less than 60% of employees had been in their job less then two years and 68% were planning to move jobs in the next six months.
The most common reasons for changing jobs were cited as pay, employer’s culture and ethics, and lack of training. Staff turnover rates in organizations had escalated from 30% per annum in 2007 to 42%. I took some comfort that at Harvey Nash our training and leadership development budget has doubled and our emphasis on core values, culture and ethical trading has never been stronger.

Recruitment companies generally prosper in markets with strong demand for talent and high churn rates. It seems obvious to me that while unemployment is such a low risk in our core markets, talent will still be hard to find and even harder to retain.

Whether Wall Street and the City of London can adjust their pessimistic forecasts and doomsday scenarios to reflect this, remains to be seen

As readers will know by now I am a non-executive director at Regent. Regent have been compiling statistics on European tech M&A for 15 years; almost as long as I have been an analyst. Indeed, I have commented on their research on many previous occasions. I'm therefore delighted to bring HotViews readers an in-depth analysis of Regent's Q2 2008 M&A statistics.

An examination of the chart above, covering the 30 month period from the beginning of 2006 to the present day, shows individual country activity has ended the period at almost identical levels to when it began. After declining buyer activity for a period of five quarters, the UK based companies showed increasing purchasing levels in H1 2008. Some of this was down to the availability of companies seeking to sell because of the impending Capital Gains Tax (CGT) changes being applied in early April 2008.

The remarkable fact in comparing H1 2008 with the same period last year is that there have been very few changes. The content and media sector witnessed exactly the same number of deals - 464 transactions in H1 2007 and H1 2008. Software was virtually the same with 225 transactions in H1 2008; just one less than a year earlier. However this did mask a decline in Application Software deals and corresponding increases in both Consumer and System Software acquisitions.

IT Services deals have fallen some 10% over the course of the year, driven down by falls in Consulting and Outsourcing transactions. Conversely there has been strong interest in IT Solutions companies with a vertical focus. The telecommunications sector has been the primary casualty, particularly in the latest quarter with deal flow down 29% on Q1 2008.

Although public company valuations have fallen substantially in 2008, Regent's price to earnings (PE) ratios have remained reasonably consistent for the past few years. Indeed they staged a small recovery in Q2 2008. It should be remembered, however, that the components of value are quite different between public markets and acquisitions. With the former, the institutional investors are looking more to the short term and are seeking liquidity amongst the small cap stocks. Whereas with acquisitions, the cash rich trade and private equity buyers are investing more strategically and for the longer term. The price to sales (PS) ratio has displayed greater volatility ending the half on 1.30.

Outlook?

Whilst it is clear that deal activity peaked about a year ago, Regent did say that acquisition activity would remain high even in difficult economic times. However the resilience of deal flow and valuation levels has been surprising given all the economic gloom around. A serious economic recession or major collapse of the stock market will eventually apply a serious drag on activity – but there are still no signs of that. Cash is the driver, and although the banks and consumers may be running short, the technology trade and private equity guys have plentiful supplies at present.

Note – the recorded valuations include 50% of the maximum contingent consideration in deals with earn-outs and apply to historic performance.

Every newspaper I read this weekend had 'Don't Panic' in one of its headlines - all referring to the FTSE100 entering Bear Territory last week. Just as in my Friday piece - What if what the economists taught us was wrong? - I suspect that Don't Panic is not that good a piece of advice either. Last autumn, when Northern Rock investors queued around the block to withdraw their savings, they too were accused of panicking. But bluntly I thought they behaved entirely rationally. Indeed, if I'd had a branch account (rather than the internet-only account I had) I'd have queued up with them.

You might not have heard too much of WNS. It’s a US quoted, ex-British Airways BPO spinoff. You might also not heard that yesterday it pulled off one of the biggest UK and Ireland BPO contracts awarded in a long while. It secured an 8 year, $1b BPO contract with UK insurance company Aviva and its Irish subsidiary, Hibernian . In the process WNS acquired Aviva Global Services, Aviva’s offshore BPO company, for £115m to be financed by a new $200m debt facility. WNS (which already provides some BPO facilities to Aviva) gets 5800 seats in Bangalore, India and Colombo, Sri Lanka as well as operations in Pune and Chennai.

This new contract will put WNS at a $500m annual revenue run rate with c$60m net revenue (as ever, excluding all the bad stuff) by Q1 2010 when the contract comes fully on stream.

In the UK BPO world, this ranks as a really big mega deal. It really does show that, even in (or is that because of?) times of economic downturn, the BPO players can do well.

Contrary to what you might expect if you read the warnings earlier this week from one of their competitors (Morse) Computacenter’s results today were really rather good. In H1 revenues grew 8% and investment banking grew 21% (though 1Q07 was quite weak) and is expected to be above 10% in the next quarter too. Now that is really counter to what you will have read almost everywhere. It looks like banks are continuing to build and equip a lot of data centres and Computacenter seems to be getting more than its share.

Indeed, praise where praise is due, Computacenter, at long last, seems to be making that change from PC reseller to software and IT services company. Indeed “strong growth” was recorded in their Software Business Unit – although investment there did dilute margins

We were rather amused at CEO Mike Norris’ comment that "PC’s are now ordered, not sold". Only C£1b of Computacenter’s c£2.4b revenues now come from PC sales. It’s their datacentre operations which are most impressive. With Cloud Computing now finally destined to be at the centre of the future of IT, Computacenter could be really very well positioned.

This morning Thales was revealed as the bidder for nCipher with a 300p cash offer valuing them at £50.7m. Yesterday, shares in nCipher soared by 73% to 260p after they put out an RNS announcement.

Bluntly, this is a pretty amazing price - last achieved in the dot.com heights and c140% more than its pre-bid price. I am reminded that, on top of this, nCipher returned around £40m to shareholders over a year back too.

One note of caution though - nCipher has been here before. Back in early 2006 it received a similar 300p bid from SafeNet which was later abandoned (I won't go into the complex reasons here)

But I can think of at least one HotViews reader who will be pleased today and even happier when the cash is finally banked!

Contrary to what you might believe if you look at the few comments posted on this site, I do get loads of comments ‘off-the-record’ and ‘not-for-publication’ from readers.

One of the more interesting arrived today. A reader chided me for taking what economists and so-called ‘city expert’s’ said seriously and suggested I read “What if what the economists taught us was wrong? from SeekingAlpha which was itself occasioned by an article in FT on 6th July The villains are not the bankers but the economists.

I must admit it started to resonate with me when I read. “Some U.S.-based financial advisers might be asking themselves today, eight years into a secular bear market in stocks where "stocks for the long run" may not make a whole lot of sense for someone whose "long run" is only 15 years or so and happened to begin around 2000”. I’m always being told that equity investment always beats a building society – but it has never worked for me! Even over the ‘long-term’ it is all about when you get in and when you get out. Something I always get wrong.

But the reader really wanted me to read the last bit from Andrew Mellon, Herbert Hoover’s Treasury Secretary, describing his solution to the 1929 downturn:

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate... It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”.

In other words, let 'em all go bust and start again. Seems a bit extreme to me! As he mused “Are there enough ‘Enterprising people’ around anyway?”. Problem is that when you are "an IT veteran" (as I was called in several newspapers this week) maybe you haven't got the time to do it all over again either.

Further to my report on Tuesday - Morse restructures For Sale? - I note that Morse's Executive Chairman, Kevin Loosemor, has bought 300000 shares at 46.9p for £141,000. This takes his holding to 700,000 .

The incentive for the purchase was that, yesterday, Loosemore was granted a nil-cost option over 1.05m ordinary shares exercisable in two year's time, but that would lapse unless his shareholding topped 619,500 ordinary shares within three-months

9th July 08
No iPhone for Holway...yet

In answer to the deluge of readers wanting to know if I have secured my 3G iPhone (see 11th June 08 - Holway in a quandary), I'm afraid the answer is "not yet". It looks as if the device is a complete sellout and I have no intention of queuing at an O2 shop early Friday morning. It is interesting that so, so many Apple fans have actually taken the advice I have long offered to "Never buy a Version One Apple product". The demand for the 3G version outstrips the demand for V1 by many times.

The switch from mobile to smartphone is now well under way. This year c11% of handsets will be smartphones (up 29% on 2007) but this will grow to c19% in 2009. It's likely to top 30% by 2010. The iPhone is actually doing a lot of good to RIM (Blackberry) by boosting the whole market. There are now an impressive set of new smartphones in the offing in the next few months - the Nokia N71 and Blackberry Bold being the most interesting.

My desire not to queue means that I will have a bit longer to deliberate my purchase.

My blood started to boil when I read the article in last Thursday's FT - Call for more relevant training as IT graduates struggle to find work. The article was occasioned by a report that one-in-ten computer science graduates were still unemployed several months after graduating - the highest rate for any subject. The answer put forward by 'the experts' was not to teach them "computer sciences" at university but "service sciences" instead.

That seems to be missing the point. As I said back in January (and many times before and since) -See Climbing the IT career ladder with the bottom run missing - the REAL problem is that most of the entry level jobs for IT staff in the UK now don't exist; having been off-shored. IT graduates in India, China etal seem to have no problem getting jobs; many of them with UK or other Western firms.

As every recruiter, ITSA and resourcer will tell you, the skills that are missing in the UK right now are the 'project management' skills that can only be acquired after 5-10 years 'on the job' experience or similarly experienced top level software/network developers. In a few years time (maybe, actually, right now!) the only people with those skills as well will be those from off-shore. That way the UK will have given up any hope of having any future as a centre of excellence for IT.

Whether it is IT or loads of other careers, we need more entry-level jobs, more apprenticeships, more 'on-the-job' training, more incentives for companies based in the UK to employ our own indigenous youngsters. Putting more people through equally unsuitable university courses will not help anybody.

Morse has announced that it has seen "some deterioration in short term services in Q4 as clients have reduced discretionary spend". This, together with "continued project issues and weaker performance in Spain" means lower EBIT margins in H2 which will lead to "full year EBIT being broadly similar to 2007 (£12.2m".

Morse has also announced that Kevin Alcock is stepping down as CEO and newly appointed Chairman, Kevin Loosemore, has stepped up to Exec Chairman. With that comes a "simplified Group structure" where Morse will operate as five business units:

- Investment Management Consulting
- Business Application Services
- Infrastructure Services and Technology - UK
- Infrastructure Services and Technology - Spain
- Infrastructure Services and Technology - Ireland

Morse is one of those companies which has not only joined Holway's 50% Club but the 33% Club too. It's share price is now a third of its 2007 high of 145p valuing them at £65m compared with their c£250m revenue line.

Making the transition from a product resale company to a software & services company is a very hard move to make. Goodness - it took IBM over a decade to achieve. Computacenter is still suffering in its move. Morse has the added problem of being quite small in comparison. It has got involved in a whole range - I might have said 'mish mash' - of different acquisitions of different businesses in different geographies. Readers should remember that the management also took their eye off the ball with Monitise - now separately listed.

I applaud Loosemore's move. He's identified the main business/niche areas and geographies and put them into separate units. What today's announcement doesn't spell out is "What next?". But it wouldn't take a clairvoyant to work out that these moves are being made prior to selling these units "when the time and price is right". Morse is a clear example of where the "Sum of the parts is worth more than the whole".

The market will probably punish Morse in the short term. But Loosemore has taken the right, bold decisions which I feel sure will pay off for shareholders in the medium term.

As you cannot have failed to see from the newspapers this weekend, the FTSE100 is within a whisker of entering Bear territory - defined as a 20% fall from a previous high.

More relevant to our sector is that NASDAQ has already entered Bear territory; ending last week at 2245 - down another 3% on the week and 21.5% from the 2859 high it hit at the end of Oct 2007. Similarly the FTSE UK SCS index also ended the week down 3% at 489 - 22% off its Oct 07 high of 611.

6th July 08
Interview with Francois Barrault

The Sunday Times carries an interview with Francois Barrault, the 'new' CEO of BT Global Services who replaced Andy Green last year. See BT Global boss tunes up for new era.

I had a note from Stephen Kelly - CEO of Micro Focus - which reminded me that I hadn't commented on their excellent results announced on 27th June 08. I won't repeat them now - you can read the FT 28th June 08 - Micro Focus in bullish form as sales jump 19%. Actually revenues jumped 33% if you include the acquisitions made in the period. Plus 38.8% EBITDA growth, almost 100m of cash generated from continuing operations and acquisition of a NASDAQ company, NetManage. Given the current economic backdrop, these results are pretty damned good.

Clearly my friend George O'Connor at Panmure Gordon agrees. You can download his 4th July 08 note on Micro Focus Click here.

Kelly was generous enough to thank me for the advice and guidance from the lunch I had with him at the Vineyard on his appointment a couple of years back But added "Never complacent and lots more to do…"

As I will say at my Breakfast Briefing for Grant Thornton on Wednesday, it is not all bad news for all the companies in our sector. Micro Focus seem to have a set of offerings well-tuned to today's environment of "Make do and Mend" and getting the very best out of what you already have.

5th July 08
Windsor Castle

Further to my report on the Prince's Trust Technology Leadership Group Gala Dinner at Windsor Castle on 2nd July - See Oh what a night! - I thought you might like to see the official photo.

3rd July 08
Oh what a night!

It’s not often you get to sit on the top table in the Waterloo Room at Windsor Castle alongside Prince Charles, but that’s exactly what happened last night to my wife Elizabeth and I. Indeed, Elizabeth had the Prince on one side and Ronnie Corbett on the other.

The occasion was to celebrate the Prince's Trust Technology Leadership Group (where I was one of the founders back in 2002 and am the current Chairman) raising £5m for the Trust. Actually now it is more like £5.5m with a further £2m pledged. The 'Leadership Group' concept was pioneered by the TLG. The Princes Trust has since set up other 'LGs' – like Construction, Insurance, Women etc – which together now form one of the most significant parts of the Prince’s Trust fund-raising from the corporate sector.

And it needs it. The Prince’s Trust Business Programme alone needs £1m a month just to keep going at its current rate. Giving our disadvantaged young people the chance of a decent start in life gets more urgent by the day. We can’t just cast aside a large group of society to run feral on the streets. The Prince’s Trust, through its mentoring programme, provides the ‘role models’ that so many seem to lack at home. The problem is that the 40,000 young people that are touched by the Prince’s Trust each year is a mere fraction of the number that need such help. Hence why the technology industry has pulled out all the stops to help.

Indeed, our Gala Dinner last night raised £230,000 in its own right. But it was far more valuable than just that.

1 - It was a BIG THANKYOU to all our many patrons and supporters. I personally want to make particular mention of the two co-founders and previous Chairmen - James Bennet (E&Y) and John O'Connell. Without them, the TLG would not only not have been created in the first place but would not have been the success it is today.

2 - Capgemini used the occasion to announce that they were becoming Platinum Patrons – pledging to raise £1m over next three years. A fantastic offer!

3 – McAfee sponsored the evening which was greatly appreciated and allowed much of the money raised from the table sales to go directly to the Trust. Indeed Dave DeWalt – McAfee’s CEO - flew in specially for the occasion

4 – The guest list was truly fantastic. It included Ryoichi Bamba (President & CEO Canon), Andy Green (CEO Logica), Paul Walker (CEO Sage), Fujio Nishida President of Sony Europe as well as the CEOs of most our many Patrons and many top CIOs from both Government and the private sector..

The Prince's Trust Technology Leadership Group is (in my view!) now the best top level tech networking forum in the UK. On top of that it does fantastic work for the community.

Maybe last night the tech industry crossed from asking “Why should I join the Prince's Trust Technology Leadership Group?” to “I really don’t want to miss out by NOT being a member of Prince's Trust Technology Leadership Group!”

If you are not already involved, shame on you! For more information go to Prince's Trust Technology Leadership Group or just drop me an email on rholway@holway.com and we will quickly put that right!

Anyone who attended the Prince's Trust Technology Leadership Group dinner at Windsor Castle last night (see above) cannot have failed to be impressed with how Prince Charles made everyone he met feel relaxed and appreciated. He was introduced to many of the guests present (indeed I did much of the introducing!) and he had a special word for everybody. They all felt really ‘special’ as a result. Of course, the American guests were overawed!

As you can see from the Court Circular, this was Prince Charles fourth engagement of the day. Considering the few pence he costs us all each year, I think we got rather good value for money yesterday!

Financial Objects (FO) has become the latest in a long string of small/mid-sized UK SITS companies to succumb to a bid approach. Temenos has bid 60p (a massive 90% premium to last night’s closing price) which values FO at £27.2m. FO had revenues of £21.23m and PBT of £2.75m in FY2007. FO provides software solutions and services for banking and financial services, energy companies, property asset management and document management. They have around 500 customers including Abbey, Wachovia, Aegon, BAA, Bradford and Bingley.

My involvement with FO goes back to its formation in 1995 by Roger Foster (then of ACT fame). They floated in Nov 98 with a £82m valuation and a share price of 230p – so the ‘takeout’ price is a mere fraction of that! But that was as nothing compared with the 790p price that FO hit in those crazy days dot.com of early 2000. Although quite what FO had to do with the internet was a bit beyond me even then. Roger Foster has since stepped down and new CEO, Karim Peermohamed, who I have also got to know, has done a very good job since. Indeed, I’m sure FO’s shareholders will raise a glass to him for executing this deal

Temenos’ main competitor is Misys. It will be interesting to see how far consolidation in this sector goes…

Next Wednesday 9th July 08, I am giving a presentation on the current state of the ICT market and the outlook for the immediate future, at a Breakfast Briefing being run by Grant Thornton, Pinsent Masons and Intellect. It's at 8.00am-10.30am at Grant Thornton's offices at 30 Finsbury Square, London EC2P 2YU.

It's part of a lively debate on the topic"Six months into 2008, how has the credit crunch in PE affected the mid-market technology sector?". The full programme is

• Overview of trends Jan-June -Sarika Patel- Head of Technology- Grant Thornton UK LLP
• The state of the market - Richard Holway
• The Company perspective - Neville Davis - Chairman - GoIndustry Plc and Bluefin Solutions
• The funder perspective - Jamie Brook- Gartmore
• Panel discussion

Readers will know my interest in the 'fate' of Informa as Informa bought Datamonitor which had bought Ovum which had bought Richard Holway Limited. (See my post on 9th June aptly entitled "There was an old lady who swallowed a fly...") I still have a lot of affection for the 'old firm' and my friends who have remained there.

Informa has just confirmed that it has received a 506p proposal from a private equity consortium led by Providence Equity.

Informa said the consortium, which also includes The Carlyle Group and Hellman & Friedman, had made a preliminary 506p per share bid on 26 June. The group's shares have risen 11% in today's trading.

Just to close the loop on the Flomerics story (See previous comment) , yesterday Mentor upped its bid from 104p to 122p/£30m which was enough to secure the backing of the board. This really is a very good outcome for Flomerics shareholders. You should remember that when Mentor first bought its stake in March the shares were just 50p.

I feared that Flomerics might be being too greedy and that Mentor would walk away too when the Autodesk bid evaporated last week. So full marks to the Flomerics board for a great strategic game which paid off. Of course, I'd be writing quite a different article if it hadn't!

A selection of the further responses received to my So you think this is bad? post yesterday:

Alywn Welch, CEO of Parity offered this view:

I don’t think it has bottomed yet. IT spending in some sectors may have done (eg investment banking, maybe), but not in all. We are seeing a “drip-fed” downturn, probably due to the causes which are taking their time to work their way through the various sectors in the economy. The last place to be hit will probably be Public sector, maybe in 12 months time, as the government is faced with a choice of serious spending cuts or tax rises (and either will lose it the next election).
Demand overall for IT jobs feels flat, but that hides strong demand in some skills/sectors and weak demand in others. We can see it in the training market, a traditional bellweather. Demand for project mgt, ITIL et al stays strong, whilst technical skills training is weakening and commoditising fast.

Interesting question: will a downturn encourage more offshoring or not….. In one sense, a North American sense, it will accelerate a move offshore. But in a “Continental Europe” sense, both the restructuring cost and the emotional/political tension this may cause, could stall a move of work offshore. It is easy to grow offshore when increasing capacity; less easy to displace jobs in a tightening economy, at least for some. Look out for signs of a slowing in offshore demand in the UK and Nordic.

Conclusion: no big bang of lower demand, but a rolling wave by sector/skill area – which makes it difficult to predict.

Ian Spence of IS Research answered our “What now?” question on his own Megabuyte email service yesterday (and why shouldn't he?) but gave permission for me to reprint it below:

After a truly dreadful H2 last year, the first half of 2008 could best be described as lacklustre. So what is in store for the rest of 2008 and beyond? Well, in our view, the outlook for H2 remains difficult and we continue to believe that trading will be tough through 2009 before improving again in 2010.

We believe that there has already been a reduction in the expected growth rates for many IT companies this year and we expect relatively flat or even lower growth next year. However, all IT companies were not created equal and market positioning and ability to execute will be key to outperformance. We believe that strong technology drivers exist to help well positioned providers to outperform and we do believe that IT spending generally will stay ahead of GDP growth. In this regard, we would highlight renewed interest in outsourcing amongst mid-market companies, particularly application outsourcing as the SaaS trend gathers pace. Hence we expect managed services in all of its forms to be a source of solid growth as companies use it as a means of reducing costs. Allied to this, is the continuing trend to mobility which drives spend on infrastructure, networks and integration services.

We would also pick out spending on Security and Green IT as lively and resilient areas of spend in the sector going forward. Lastly, we see IT spending directed at regulatory and compliance matters as a safe haven. This could apply Basel II and MiFiD compliance in the financial services sector or Sarbanes Oxley compliance in the broader corporate sector.

Conversely, we believe that p