Brexit: Macro threats, micro opportunities for TMT firms

03 May 2019

Brexit: Macro threats, micro opportunities for TMT firms

Far from being a ‘nation of shopkeepers’, as Napoleon famously and rather disparagingly quipped, we are in fact a country of budding entrepreneurs; especially tech entrepreneurs.

A recent report by digital product designer Studio Graphene revealed Britain’s tech start-ups are overwhelmingly confident about the next 12 months, with 79pc expecting to increase turnover, despite the government’s disastrous handling of Brexit.

British entrepreneurialism is underpinned by a dynamic SME community, of which many are TMT firms. In 2018 alone, some 5.6 million small businesses generated a combined annual turnover of over £2 trillion, representing 52% of all private sector turnovers, according to the National Federation of Self Employed & Small Businesses. And in the latest index compiled the Global Entrepreneurship and Development Institute, the UK ranks fourth in the world for entrepreneurialism after America, Switzerland and Canada; the highest ranking in the EU.

This entrepreneurial optimism was evident at Evolution Capital’s Life After Brexit event, held recently in one of the UK’s oldest private banks, Child & Co.

Francis Child, a London apprentice who eventually became the city’s Lord Mayor, founded the bank in 1640. He was a fine example of the transformative qualities of the British entrepreneurial spirit. Some four hundred years later, it was apt to be gathered at his bank with some highly innovative telecoms entrepreneurs to discuss how the UK’s withdrawal from the European Union, the single most impactful financial event of the 21st century so far, will affect our sector.

Brexit has become a euphemism for bungling politicking and procrastination at the highest levels of government. And yet, at the level where it really matters, in the laps of business leaders, we have noted an air of quiet confidence. As a boutique corporate finance firm specialising in advising mid-market TMT firms for more than two decades, we know our sector well. Our view is that despite the dark clouds gathering, Brexit will deliver multiple opportunities to those willing to seize them. In fact, many TMT entrepreneurs have been planning for Brexit for a number of years and are prepared for the fallout.

In the three years since 17.4 million UK voters decided we should exit the European Union, there has been a media tsunami of dire premonitions and impending warnings of the sky falling in. And yet investment in our industry is far from drying up.

“There has been no slowdown in M&A in the TMT sector whatsoever. In fact, the complete opposite is happening. The private equity market is presently very bullish and has been pushing the companies they have invested in to accelerate their growth; certainly not rein it in. The numbers are generally looking good at the moment. If this is part of the Brexit effect – let’s have more of it,” says a senior figure from the TMT banking sector.

Of course, in the current climate, not all businesses are thriving. However, the underlying sentiment at the Evolution Capital Life After Brexit event was that innovators will thrive in a post-Brexit world. Clearly, the traditional ‘calls and lines’ businesses have had to diversify into ICT and beyond, to match the demands of a changing marketplace. Consensus tells us the successful operator in our market will probably be a one-stop shop encompassing all sorts of skills and product sets. Could hybrid cloud-based consultancies become the vogue?

But what are the threats posed by Brexit, if any? One voiced by many was the risk to the international talent pool; perhaps the single most nerve-jangling factor for any innovative telecoms supplier. There are companies already well set up to meet this threat, having been trading in markets outside the EU for years. One such company is VanillaIP, a supplier of cloud-based communications solutions that has been trading internationally for some time and is perhaps a model for telecoms companies going forward. It outsourced some of its services to the US in 2003, its IT development to India in 2010, started sourcing products from China in 2017 and has been selling into non-EU markets since the referendum.

Dave Dadds, managing director of VanillaIP, says: “There are much bigger markets than the EU. In fact the European community has always been very inward looking. As a company, we look for sales, staff and suppliers on a global basis and that is how we intend to carry on. The UK has become lazy and not very focussed on creating growth in international markets. Leaving the EU will force us to create a better structure for growth. There is a good reason why the largest technology companies are in the United States.”

Another company being highly proactive on this front is Ultracomms Communications, which has been providing cloud-based management solutions since 2004. Its chairman Robert Bates says: “We are constantly holding discussions with companies that have an international reach in order to look for new channels and partnerships. The UK finds itself in an unnecessary situation but we need to get on with it and definitely need to start trading as a nation again.”

Bates adds: “We don’t see the freedom of ‘worker’ movement as a major threat. As a company at the cutting edge of technology, our software developers need to be in-house. If, for any reason, we are forced to move off-shore I can only see that there would be a substantial reduction in the high quality of our development capabilities.”

Even those businesses originally in favour of remaining in the EU echoed the general sentiment the opportunity in our market space will only be enhanced after Brexit. In the best Darwinian traditions, those who evolve quickest will not only survive, but will also thrive.

Nikki Guest, Network Services Director of NGC Networks, a rapidly growing Yorkshire-based company, providing telecom and internet connectivity services, is just one of those evolutionists. She says: “With all the noise that Brexit has made, customers have understandably been reticent to commit to large capital investments and this has added to the length of our sales cycle. As an innovative supplier, we have reacted by changing our business model accordingly, such as bringing in new cloud-based products and diversifying our services. Other measures include encouraging customers to move away from heavy CapEx based investments and go down the OffEx route to reduce the strain on their cash flow. Ultimately, I see Brexit as a very positive agent of diversity and change ”

It appears the British entrepreneurial spirit is far from dampened. Indeed the post-Brexit landscape for the telecoms market could pitch up all sorts of compelling opportunities for the right players. Amid all the doom and gloom surrounding Brexit, this is a welcome sentiment.

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