“Companies’ balance sheets are improving, but the confidence and appetite to complete mergers and acquisitions shows no increase and is even falling.

“That’s the surprising result of research from professional services firm KPMG, which looked at financial results and forecasts for large, publicly quoted companies across the world.

“In the UK, forecast net debt compared to EBITDA is set to fall 30 per cent over the next year, while net debt itself will drop 21 per cent, showing extensive deleveraging. So it appears companies are building up war chests to fund M&A activity.

“But that picture is spoiled by analysts’ forward price/earnings ratios, which are down 14 per cent over the last 12 months for UK companies. David Simpson, KPMG’s global head of M&A, calls it a ‘strange impasse’, where companies are paying down debt, but market confidence is falling.

“He compares it to the situation faced by the stock market in general, where valuations are improving despite economic nervousness – ‘climbing a wall of worry’.

“Research into IPOs on AIM over the past year from our sister site Growth Company Investor helps to gauge how far confidence is returning to the junior market. Again, there’s the same pattern: the numbers point to improving market health, with 47 new issues raising money compared to 13 in 2009, but there’s little trace of the bullishness and excitement that characterised the glory days before the credit crunch. Chilton Taylor, head of capital markets at accountancy firm Baker Tilly, says that AIM is ‘still fragile’, though he adds that its continued success in attracting companies from overseas, especially emerging economies such as India and China, is an encouraging sign.

“As we enter the Chinese Year of the Rabbit, let’s hope investors and dealmakers take their cue from that animal’s legendary fecundity, and not its timidity.”

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“Most businesses are backing George Osborne’s spending cuts, but there will be more pain before the benefits are felt.

“On the plus side, entrepreneurs will be pleased that spending cuts, not tax rises, are making up the bulk of Osborne’s austerity package. Though of course that will be of little comfort to those who rely on public sector contracts which will now not be renewed.

“But then there’s the half a million unemployed, which PricewaterhouseCoopers actually estimates at a full million. The impact of public sector redundancies will be felt throughout the whole economy, and the private sector will struggle to absorb more than a fraction of those out of work.

“Meanwhile, borrowing continues to rise. It hit £16.2 billion in September, £2 billion higher than feared and the highest figure since records began.

“Osborne’s learned a few tricks from the last government. He’s still putting his faith in ‘efficiency savings’ whose efficacy is, quite frankly, hard to credit.

“That’s not to say there isn’t waste on a massive scale in the public sector. Anyone with a friend or family member who is a teacher, nurse or council worker knows that.

“But how to apply the scalpel so skilfully that the waste is cut out and services remain unaffected? There simply aren’t the mechanisms to do that, and employing armies of expensive consultants would defeat the object. It’s the kind of effort that needs long-term thinking, even investment, and the government needs to cut spending right away.

“To sum up, the deficit is still massive, and rising. Spending cuts and tax rises will have an undeniable impact on the economy. And there will be a terrible human cost.

“If it works, the government will be praised for taking decisive action. If it’s judged to have made a bad situation worse, the unpopularity of the last administration will look mild compared to how the leading parties will be vilified.

“You can’t help but feel the recent jubilation displayed on the government benches was a bit premature.”

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Bear in mind that these men and women have presided over average sales growth of 41 per cent and pre-tax profits growth of 71 per cent over the past year.

You might expect exuberance and optimism in the face of difficult economic circumstances, and there was some of that.

But there was also a sense that the growth of their businesses was hard-won and that it was most definitely not taken for granted. These are not business leaders content to sit back and toast their success, but entrepreneurs who regard themselves as being in the middle of a journey.

Sally Bailey is CEO of clothing retailer White Stuff, which has sales of £58.4 million. She’s not short of ambition, hoping to quadruple that figure in five years, but she’s also pragmatic. “We have to continually surprise and innovate”, she says. “If you don’t innovate, you die.”

That theme is taken up by the MD of Pukka Pies, Tim Storer. Steeped in traditional values, the company has always stuck to the line that you need to heat pies in the oven for the best results. It hasn’t changed that mantra, but it has just launched a pie that’s specially adapted for microwave heating. Again, it’s about moving with the times, having values but not being wedded to a particular way of doing things.

Other companies in our top 50 have seen double-digit growth in profits and turnover while navigating some pretty tricky obstacles. Balhousie Holdings, a Scottish residential care provider, was recently denied funding from its bank (it has now secured finance with another). Three-year-old weight loss company All About Weight has fought off countless legal challenges from market incumbents. And plant pot maker The Stewart Company was over-geared by a private equity firm and was making annual losses of £1.2 million before current MD Lee Mowle led a successful turnaround.

Recent surveys have suggested that entrepreneurs are overwhelmingly optimistic about the future. That may be true, but this isn’t mindless optimism which expects everything to run smoothly. It’s the optimism of those who have made up their minds to get on with the job no matter what life throws at them.

Article contributed by GrowthBusiness.co.uk

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The net wealth of the UK declined 1.4 per cent to £6,669 billion last year, according to official figures. It was a lesser drop than the year before, when the country’s wealth fell 4.3 per cent, but what is more interesting is how that wealth is made up.

The majority of it, 61 per cent, is residential housing. That makes it immediately obvious how vulnerable the UK is to a fall in property valuations, which are sustained largely by the ability of households to borrow money.
 
Since 2007, some £265 billion has been wiped off the value of houses, and prices have just started to fall again.

Civil engineering works – roads, bridges and so forth – weigh in as the second biggest asset on the UK’s balance sheet. They’re worth £725 billion, more than a tenth of the UK’s net wealth and more valuable than our entire portfolio of intangible assets (software, patents, artistic works). So much for the knowledge economy.

Slice the data another way and other weaknesses of the UK’s economy are laid bare. Households are worth some £7,244 billion, more than the entire net wealth of the country. That is possible because other sectors are in the red: notably central government (worth a negative £395 billion) and financial corporations (minus £390 billion). Private, non-financial corporations knock another £323 billion off the UK’s worth, largely thanks to the liabilities of a handful of massive companies.

Despite the dips over the last two years, the UK has seen growth of 53 per cent in its net wealth since 2001. But more than three-quarters of that (76 per cent) is due to the residential property boom, which no-one now expects to be repeated any time soon.

All in all, these figures paint a picture of a country that is like a grand old stately home which has been remortgaged by its impecunious owners: outwardly impressive but hard to maintain in a decent state of repair.

It may be that in future some international equivalent of the National Trust will step in to preserve the UK as a historic curiosity, converting the Isle of Wight into an oversized gift shop. In the meantime, the new government must do all it can to encourage investment in businesses, not in bricks and mortar.

Article contributed by Nick Britton, Growth Business

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Numbers of deals completed between 2006 and July 2009 in brackets.

Deals up to £250,000
YFM Group (24)
North West Equity Fund Managers (6)
Braveheart Investment Group (5)
Ridings Early Growth Investment Company (5)
Finance Wales (5)
NESTA (4)
Envestors (4)
Catapult Venture Managers (4)
UK Steel Enterprise (4)
South East Growth Fund Managers (3)

Deals between £250,001 and £2 million
YFM Venture Finance (39)
Catapult Venture Managers (29)
NorthStar Equity Investors (25)
NESTA (18)
Scottish Enterprise (17)
Braveheart Investment Group (16)
Finance Wales (15)
Midven (13)
Enterprise Ventures (13)
MMC Ventures (12)

Deals over £2 million
Accel Partners (26)
3i Group (25)
Amadeus Capital Partners (22)
Scottish Equity Partners (17)
Atlas Venture UK (13)
Balderton Capital (11)
Intel Capital Corporation (8)
Tudor Investment Corporation (8)
Benchmark Capital (7)
Goldman Sachs (5)

Research compiled by Bureau van Dijk from its ZEPHYR database. Deals had to involve the acquisition of a minority stake in a UK company and were capped at £500 million.

Contributed by Growth Business www.growthbusiness.co.uk

The views contained in this article are solely those of the author and do not necessarily represent the views of the Commercial Finance People

The influential think tank the National Institute for Economic and Social Research reckons the economy expanded 0.2 per cent in the quarter to August – a big psychological boost for a lot of businesses as it would suggest we can consign this recession to history. Exports are up, the stock market is buoyant, and big corporate deals such as the Orange/T-Mobile tie-up and Kraft’s acquisition of Cadbury are being mooted for the first time in ages.

On the darker side, unemployment is still growing. I recently emailed two friends, both of whom were working for large corporates a year ago, to find the messages bounced back. Both had lost their jobs. Next year they will be joined by a crowd of public sector workers as a new government struggles to balance the books. The price of gold has broken $1,000 an ounce, indicating investors are still worried about gremlins in the global economy. And the £8.4 billion fall in lending to non-financial businesses in July was the biggest since records began.

There are surely few periods in living memory when economic indicators have been more keenly pored over, or generated more headlines. And yet it’s businesses that create statistics, not the other way round. Just as you can’t take success for granted in a growing economy, failure is not inevitable in a shrinking one. Whether a company is swimming with or against the economic tide will be determined by the ability of its management to tune into business opportunities rather than the daily onslaught of economic data and expert debate.

www.growthbusiness.co.uk

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The views contained in this article are solely those of the author and do not necessarily represent the views of the Commercial Finance People

The JCB Tough Phone made headlines last year as gadget reviewers lined up to put its “indestructible” tag to the test. In the name of science the phones were dropped, pummelled, battered and crushed – and emerged still working. What many people reading those reviews didn’t realise is that the Silicon Valley-based company behind the phones, Sonim, had been through a similar ordeal. 

‘We became the pariah of the industry,’ says Bob Plaschke, Sonim’s CEO. ‘We spent millions of dollars [of investors’ money] chasing a grand vision that wasn’t grounded in solving real people’s problems.’ 

The vision was internet telephony (VoIP) over mobile phones; a prospect that excited Sonim’s venture capital (VC) investors so much they invested $47 million (£34 million) before the company had made a sale. Sonim won awards and contracts, but critically, failed to deliver working software on time to the mobile operators it had signed up. The hype quickly turned to derision, and with a burn rate of $1.8 million a month, it was only a matter of time before Sonim ran out of cash with ‘no chance of any viable funding after that’. 

It’s a position many entrepreneurs will be familiar with, though Sonim’s journey from stardom to near-bankruptcy will be faster than most. Jamie Constable, CEO of turnaround investment firm RCapital (which now owns Little Chef) says there’s ‘a very steady flow of companies getting themselves into serious financial trouble’. Survival in this environment depends ‘not on how well run you are, but on how you’re structured financially’.

Limited options 

The Art Group, which supplies touch screen kiosks enabling visitors to art galleries to print off their favourite works, is a case in point. RCapital got involved with the business last year after its VC backer decided not to invest further.

There was an added irony as the backer had already replaced the old management team and agreed in principle to a fresh injection of funds.

‘The company’s only choice was to go to the bank for the money, and of course, if the VCs won’t do it, the bank won’t do it,’ says Constable. ‘The business had already put in place the operational changes it needed to return to profitability; it was just a case of [repairing] the balance sheet.’ RCapital bought the company for £2.5 million and made the changes needed to get it back on track. 

Deeper cuts

For investors like Constable, it’s essential to distinguish between good businesses that are simply running out of cash, such as The Art Group, and those with more fundamental issues. When Rob Woodward took over Scotland’s ITV franchise STV in 2007, he knew it was in serious financial difficulties: its market cap had shrunk from £2.1 billion in 2001 to less than £200 million that year, partly the result of an unsuccessful expansion strategy. Now he admits that he underestimated the scale of the problem.

‘We informed the City upfront of the reality of the situation, and it was far worse than anyone had expected,’ says the CEO. ‘All the good news had been drained from the company: the plans were far too optimistic. So the starting point was very different to what we had anticipated, though the endgame remained the same.’

When Woodward took over, STV’s board resigned en masse, leaving him free to pursue his threefold strategy of rectifying the ‘challenged’ balance sheet, reducing costs by 
refocusing on STV’s core business, and investing in new areas he believes have growth potential.

Though the company’s share price is still in the doldrums, Woodward has transformed losses of £23 million in 2007 to pre-tax profits of £14 million, reduced net debt from £47 million to £36 million, and returned £30 million to shareholders (after a rights issue raising £92 million in December 2007).

The most difficult aspect of the process, he says, was ‘delivering the message of huge cost reductions and at the same time investment in future growth opportunities’. Some 120 staff were made redundant, while a ‘new team’ was brought in to grow STV’s online presence. 

Strategic thinking

Woodward’s point is instructive. Few turnarounds can be achieved without an injection of cash, and cutting costs is another common theme. But simply paring a business down and pumping it with money could be flogging a dead horse unless there is a fresh approach to go with it.

For Plaschke, whose role at Sonim changed from CFO to CEO after the company went into crisis mode, the first priority was survival. By cutting the company’s head count from 180 to 15, its monthly burn rate was reduced from $1.8 million to $500,000. But Sonim still had no way of making money.

Plaschke began in-depth research into potential markets, leading him away from the idea of selling generic software to mobile operators towards producing a ‘ruggedised cell phone’ aimed at blue-collar workers. It’s a fascinating story with its own ups and downs: Plaschke secured another $10 million from his investors, but battled long and hard to find a distribution channel for the phones, eventually striking lucky in Sweden. But the essential point is that Plaschke had completely changed tack.

‘The board found a presentation I’d given to them before, and there was one slide that listed “12 reasons we’ll never become a cell phone company”,’ Plaschke relates. ‘Well I still believe in six of the 12, but I’ve disproved the other six. It was a choice between shutting the company down and firing all the employees, or selling more phones.’

The decision to sell more phones resulted in sales of $31 million last year (which Plaschke expects to increase to more than $40 million this year). With just three salespeople, Sonim distributes its phones in 42 countries and is now at break-even.

Out with the old

Sometimes turnarounds are more about a fresh approach than a complete change of direction. Richard Brighton, MD of electronics manufacturer Exception EMS, was hired to turn round a company that was ‘going through a degree of stagnation, always making around £17 million, always chasing sales to make up for the customers it had lost, always at a break-even level’.

When Brighton first walked into the company, he saw a sea of green printed circuit boards covering every available surface. Looking into how it was run, he found it ‘chaotic and disorganised’: the manufacturing process was ‘a collection of fiefdoms’ and there was ‘a lot of work in progress’ with no one taking responsibility for it. Underlying these problems was the autocratic management style of the previous MD, who had been ‘asked to leave’.

‘One of the first meetings I had with management, I asked people for their thoughts and it was like tumbleweed. It was so obvious they had never been asked that kind of question before,’ Brighton reveals.

The changes were radical, but they were operational rather than strategic. Brighton created five ‘mini-MDs’, each of whom was given responsibility for a number of customers. Work for each customer was to be managed in a separate, U-shaped area, so that progress was clearly visible. There were management changes too, and a reduction in head count, from 250 to 210, achieved mainly without redundancies.

The result was that turnover increased from £17.5 million in 2007 to £20 million 
in 2008, with an operating loss of £500,000 transformed to a profit of £1.1 million. Most notably, that was achieved by gaining only one major new customer and simply serving the others better so the company won more work and, in some cases, could justify raising prices which had not been adjusted in years.

In a similar vein, RCapital’s Constable states that Little Chef’s problems boiled down to the fact that outlet managers had no sense of accountability, and staff were demoralised. ‘It was about giving ownership back to the people running the restaurants; we improved the food but kept prices the same, and told managers that if they made excess 
profits they’d be rewarded.’

Deep breath

Viewed with hindsight, the solutions to a company’s problems may look obvious. But when you’re at your lowest ebb, those troubles can seem insurmountable. Plaschke, an ex-employee of consultancy firm McKinsey, says that if he had applied the principles he learned there to Sonim, there would have been no option but to liquidate the company as quickly as possible.

‘There are lots of folks who told me to shut [Sonim] down and get another job,’ he recalls. ‘And if you looked at the business in any rational way, I should have done just that. But entrepreneurs defy logic. At times like these, you’ve got to trust your gut conviction and follow it, even if it leads to failure.’

Business Recovery Terms 

DIY turnarounds

Cutting costs, accepting low profitability and focusing on retention of customers may work in the short term, but often you’ll need to look further ahead and consider more radical changes to your business, writes Malcolm Prowle, a professor at Nottingham Business School. 

Restructuring

Think big, like a revision of product specification, a change of location or a different distribution method. Or withdraw from your current line of business entirely and invest in an alternative more suited to the times.

Working partnerships

Economies of scale can be achieved as businesses pool resources such as buildings, equipment, specialist staff and back office functions. New products can be developed on the back of the companies’ combined expertise.

Mergers

A business may not constitute a viable independent entity in the long term. If other companies are in the same position, a merger may be the most feasible option, minimising competition and increasing market share. 

Contributed by Growth Business:   

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