Britain’s largest technology company had an inauspicious start to the year: after it published its first-half results last week, shares in Micro Focus dropped by a fifth.
Chris Hsu, the chief executive who took up the role last year, marvelled that this was front-page news in the UK, whereas in his native US, where the company is also listed, it hardly got a mention.
Micro Focus says it is the seventh-largest software company in the world, since an $8.8bn merger with HP Enterprise’s software business in 2016. But the UK response to its poor results highlights the fact that this until recently rather obscure UK business scratching money out of legacy software, is now the biggest fish in a very small pond of large British technology companies.
Together with Sage Group, which has been the FTSE 100’s only constant tech presence since the dotcom bubble burst at the turn of the century, these are the only two technology businesses left among the large-caps. Sophos, the cyber security company, is the only other technology company present in the top 200 UK listed companies.
This dearth of big companies shows how busy foreign buyers have been in recent years: high-profile companies including Arm Holdings, Imagination Technologies, Logica, CSR, Autonomy and Misys, have all been snapped up and thus disappeared from UK public markets. Those tipped to be the next generation of large listed companies, such as Shazam, DeepMind and Skyscanner, have also been bought before listing.
Lorne Daniel, an analyst at broker FinnCap, said this has left a gap in the market. “The loss of Arm and Imagination has hamstrung us. Where is the excitement? We are short of really big technology companies so we need to look to the second tier for growth.”
Both Micro Focus, founded in 1976, and Sage, the accounting software company founded in 1981, are elder statesmen of the UK sector. They have reputations as slow and steady businesses far removed from the forefront of high-tech development. Mr Hsu said his company is “non-sexy” compared with tech businesses in Silicon Valley.
Yet these old stagers of UK software have turned the tables on the US market. The Micro Focus reverse takeover deal with HP quadrupled the size of the company. Sage, which was the fastest-growing stock listed in the UK in the 1990s thanks to a series of takeovers, bought US rival Intacct for $850m in July last year, its largest-ever deal.
Micro Focus is on the hunt for more despite “bumps in the road” in integrating HP. Mr Hsu said there are 200 companies in legacy enterprise software with revenue between $101m and $2bn that could fit in with its strategy.
The company has earned a reputation as a “hard-nosed” British business intensely focused on value creation. One investor said the share price fall reflected concerns about a shake-up of the company’s management under Mr Hsu and a change of direction.
Mr Hsu argued that the company remains focused on growing its earnings before interest, tax, depreciation and amortisation, rather than revenue growth, and that its longstanding target to deliver a 15 to 20 per cent total shareholder return in the medium term is intact. “It was the same slides used in the past. It’s just a [different] guy delivering it,” Mr Hsu, a former US army captain, said of recent investor meetings.
Both Micro Focus and Sage have thrived as listed companies in London but that has not addressed concerns about the disappearance of other tech businesses from the UK markets.
David Richards, chief executive of software company WANdisco, said it has created a problem for UK technology investors. “Companies that are at the forefront of innovation are really important for the long term. Micro Focus is doing a great job with legacy but the country really needs innovative companies. That is critical for the future of the skills in the country. There aren’t enough midsize companies at the forefront of innovation and that’s not helped by investors giving retail companies — where the technology is a website or order processing — a tech rating,” he said.
Yet there are signs that some of the smaller niche UK technology companies are blossoming.
Research by Stifel analyst George O’Connor found that UK technology had “one of its best years in a long time” in 2017 for total shareholder return. Factoring in dividends, the figure was 56.6 per cent.
The main factor was smaller companies including WANdisco, with a 213 per cent return, Blue Prism at 193 per cent and Keywords Studios at 210 per cent.
Mr Daniel said the sale of companies such as Arm may have dented the pride of the UK technology sector but that investors are unlikely to be fazed.
“For them it’s an escalator. You ride it up and you ride it down again. Nationalistically it is a problem but honestly we are a small country and once we develop good businesses, the Chinese, the Japanese and the US companies will buy them,” he said.
Building on AI
UK tech investors have been left with a dwindling number of listed companies to back with only a few UK start-ups having achieved valuations comparable with Silicon Valley counterparts, writes Aliya Ram.
“The next crowd is not coming through,” said Victor Basta, managing director of Magister Advisors, a bank. “We have a handful of world class companies, but it is only a handful. We don’t yet have the yield, we don’t yet have the next crop of unicorns that shows that the ecosystem is there and strong.”
Among the UK start-ups that have gained prominence and raised money from high profile venture capital investors are Improbable, a virtual reality company that received $502m from SoftBank last year, and Graphcore, a Bristol-based chipmaker that raised $50m from venture capital group Sequoia Capital in November.
Graphcore has said it wants to expand and list on public markets. Nigel Toon, chief executive, said the UK’s expertise in artificial intelligence should help.
Other entrepreneurs argue that the government should do more to help. Last year, ministers outlined plans for a new “office of AI” and said the government would invest £45m to fund post graduate degrees in the field.
“What (the current) government has announced is more than we thought they would,” said Tabitha Goldstaub, co-founder of AI start-up CognitionX, who attended a roundtable with prime minister Theresa May and chancellor Philip Hammond in November.
“They took all the artificial intelligence recommendations (from a government review). On other issues we need to see, it’s not enough but it is a step in the right direction.”