Investment in UK digitalisation stalls despite COVID-19, reveals new survey

BY Fraser Tennant

More than half (56 percent) of businesses in the UK are not planning to increase investment in digital transformation, despite the coronavirus (COVID-19) pandemic accelerating the need for digitalisation, according to a survey published this week by Cheil UK.

The survey, which features the views of more than 200 senior decision makers from medium to large businesses in the UK on their plans for digital transformation post-COVID-19, reveals a general lack of continuity as to what the term ‘digital transformation’ means.

The retail sector, for example, lacks unity, according to the survey, with the majority of retail leaders disagreeing on what digital transformation means for their industry. Similarly, 33 percent of financial services sector respondents said their digital transformation plans had been “rolled back a lot” by the pandemic.

More promisingly, when asked what digital transformation means to their business, 48 percent of financial services sector leaders said optimising online performance and investing in new technology for in-store experiences, while 41 percent indicated setting up new digital propositions alongside core business.

“Challenges with budgets are apparent and valid, but we will see the ramifications of not investing in direct to consumer, digital and customer service in the coming months and years,” said David Bedford, director of digital strategy at Cheil UK. “This is not just about moving capabilities online; consumers expect to be kept safe when shopping in store and investment in digital capabilities – from virtual reality to contactless payments to increasing hygienic shopping experiences – is key to success in the future.”

Of the sectors planning to invest more in digital transformation, the top response among business leaders to improve customer experience was implementing faster delivery solutions and easier returns – a key challenge during lockdown as commerce switched to online. Other popular solutions included creating new products, improving site search, and better data collation and interrogation.

“The growing appetite for online purchases should be a wake-up call for those still asleep when it comes to ecommerce and digital capabilities,” continued Mr Bedford. “If you cannot provide the shopping experience your customer wants when they want it, they will move on.”

The survey also found that 75 percent of respondents were unimpressed with the majority of other businesses’ online customer experience.

Mr Bedford concluded: “The customer experience is key, and in a COVID-19 and post-COVID-19 world, this has to be considered and embedded as part of digital transformation to meet the needs of today’s customer.”

News: UK business leaders scale back plans to invest in digital transformation

PE and VC investment in UK business hit £22bn in 2019, reveals new report

BY Fraser Tennant

Private equity (PE) and venture capital (VC) investment into UK businesses reached more than £22bn in 2019 – an increase of £1.6bn on the previous year  – according to a new report by the British Private Equity & Venture Capital Association (BVCA).

In its annual ‘Report on Investment Activity’ the BVCA reveals the full breadth of the impact of PE and VC on the UK economy, with a total of 1530 companies across the country having received backing in 2019, an increase of 15 percent on 2018 figures.

“As long-term, responsible investors, PE and VC have a key role in supporting the recovery post-COVID-19, said Michael Moore, director general of the BVCA. “What these 2019 figures demonstrate is the size of our industry’s economic impact, building businesses and jobs across the UK.”

The report’s key highlights include: (i) VC investment increased by 67 percent year-on-year to £1.65bn, with 821 companies backed, an 18 percent increase; (ii) the South West of England received the largest amount of PE and VC capital investment (11.6 percent) outside of London and the South East, followed by the North West (9.6 percent) and the West Midlands (7.8 percent); (iii) the technology sector saw the largest number of deals and investment in 2019, accounting for 37.1 percent of all companies, and 26.8 percent of total investment; (iv) UK PE and VC funds raised £47.59bn in 2019; and (v) pension funds provided 38 percent of all capital raised followed by sovereign wealth funds (14 percent) and fund of funds (11 percent).

That said, while the level of investment is welcome, the BVCA is under no illusions that there are tough times ahead for the UK. “This year’s report clearly illustrates how important PE and VC are to UK businesses big and small, providing them with the long-term capital and the investment expertise they need to thrive,” said Neil MacDougall, chair of the BVCA. “As the country emerges from coronavirus, these attributes are needed now more than ever.”

Mr Moore concluded: “I am supremely confident that PE and VC , and the companies they back, are well-positioned to support growth, sustainability and innovation throughout the UK.”

Report: BVCA Report on Investment Activity 2019

BJ Services files for Chapter 11 bankruptcy

BY Richard Summerfield

Fracking pioneer BJ Services has filed for Chapter 11 bankruptcy protection in the US, amid a severe downturn in oilfield services demand. The company had been in discussions to sell its cementing business, and a portion of its fracking operations.

As part of the bankruptcy process, the company will now look to wind down its operation. BJ Services’ executive team has spent the past few weeks working to avert the bankruptcy and wind down, and the company is still in talks with lenders trying to secure funding for the Chapter 11 process, according to a press release announcing the filing.

Regardless of the company’s efforts, it filed for Chapter 11 in the bankruptcy court for the Southern District of Texas, listing assets and liabilities in the range of $500m to $1bn. The company also said it is seeking additional funding to see it through the asset sale and wind-down process. Meanwhile, it is working to minimise the disruption to current projects and reaching out its clients to cover various options.

“The industry continues to face unprecedented uncertainty caused by volatile commodity markets and significantly reduced demand due to the COVID-19 pandemic. Despite maintaining a leading market position and strong client support, the severe downturn in activity and subsequent lack of liquidity resulted in an unmanageable capital structure,” said Warren Zemlak, president and chief executive of BJ Services.

He continued: “After exhausting every possible alternative to address these issues and improve our liquidity, we have made the very difficult decision to proceed with a Chapter 11 process. Our Board of Directors and the entire management team worked diligently over the course of the past several weeks to avoid this outcome. Having said that, we are pleased to be in discussions with interested bidders for our cementing business and for certain portions of our fracturing business and technology.”

BJ Services was a leading provider of hydraulic fracturing services in the formative days of the US shale revolution. It was acquired in 2010 by Baker Hughes for $6.8bn. In 2017, Baker Hughes formed a joint venture to operate BJ Services’ pressure-pumping and cementing businesses. The deal involved selling 53 percent of the company to oil-services-focused CSL Capital Management and an energy division of Goldman Sachs for $325m.

News: Oil firm BJ Services files for Chapter 11 bankruptcy

Maxim and Analog Devices agree $21bn deal

BY Richard Summerfield

Analog Devices Inc. (ADI) has agreed to acquire rival Maxim Integrated Products Inc. for $20.9bn in an all stock deal.

The deal values Maxim at $78.43 per share, a premium of about 22 percent to its closing price last Friday.

The transaction is expected to close in the summer of 2021, subject to the satisfaction of customary closing conditions, including receipt of US and certain non-US regulatory approvals, and approval by stockholders of both companies.

The newly combined company will have a market value of $68bn and form a larger rival to industry leader Texas Instruments. Maxim shareholders will own approximately 31 percent of the combined entity.

“Today’s exciting announcement with Maxim is the next step in ADI’s vision to bridge the physical and digital worlds,” said Vincent Roche, president and chief executive of ADI. “ADI and Maxim share a passion for solving our customers’ most complex problems, and with the increased breadth and depth of our combined technology and talent, we will be able to develop more complete, cutting-edge solutions.

“Maxim is a respected signal processing and power management franchise with a proven technology portfolio and impressive history of empowering design innovation,” he continued. “Together, we are well-positioned to deliver the next wave of semiconductor growth, while engineering a healthier, safer and more sustainable future for all.”

“For over three decades, we have based Maxim on one simple premise – to continually innovate and develop high-performance semiconductor products that empower our customers to invent,” said Tunç Doluca, president and chief executive of Maxim. “I am excited for this next chapter as we continue to push the boundaries of what’s possible, together with ADI.”

He added: “Both companies have strong engineering and technology know-how and innovative cultures. Working together, we will create a stronger leader, delivering outstanding benefits to our customers, employees and shareholders.”

The deal is the largest technology merger announced in 2020 to date and follows a broader trend of consolidation in the semiconductor market. Previous deals in the space include Infineon Technology AG’s $9.4bn acquisition of Cypress Semiconductor Corp. in June 2019 and NXP Semiconductors NV’s $1.76bn acquisition of Marvell Technology Group Ltd.’s wireless connectivity business unit in May 2019.

News: Chipmaker Analog Devices to buy rival Maxim for about $21 billion

Nearly half of European banks hold a negative profit outlook, reveals new report

BY Fraser Tennant

Europe’s financial institutions are facing testing conditions as a result of the coronavirus (COVID-19) pandemic, with 46 percent of banks now carrying negative outlooks – a 14 percent rise year-over-year (YOY) – according to a new report by S&P Global Ratings.

In ‘S&P Credit Conditions Europe – Curve Flattens Recovery Unlocks’, S&P also notes that having been forced to set aside higher provisions to account for the pandemic, a quarter of the top 35 European banks reported a loss for the first quarter, with the remainder seeing pre-tax profit decline by a third on average YOY.

Furthermore, states the S&P report, the outlook distribution is uneven by country, with some having most banks with negative outlooks and others having just a few. Additionally, weaker asset quality and revenue pressure will exacerbate many banks’ pre-existing profitability challenges.

“Despite this, the number of rating downgrades has been modest, with most banks benefiting from comfortable capital and liquidity buffers, and unprecedented government support for households helping contain damage,” said Paul Watters, senior director, corporates at S&P Global Ratings. “As such, the economic shock is expected to be shorter-lived than a standard recession, however the ultimate extent of credit losses will depend on the speed and magnitude of the rebound, with a softer, longer upturn expected to weigh heavily on bank ratings.”

Among the key developments highlighted in the report are: (i) banks’ lending to companies in particular picked up strongly in the eurozone and the UK in March and April, confirming that banks are playing their role as providers of the financing that companies need to cope with liquidity shortages; (ii) the low cost of credit demonstrates the at least initial effectiveness of central banks’ intervention; (iii) consumers repaid some unsecured debt during the lockdown, but this trend is likely to start reversing; and (iv) access to the European Central Bank (ECB) funding facility has surged.

That said, banks may be unwilling to make full use of the flexibility on offer  to operate temporarily with lower capital levels, according to Mr Watters. “They know that at some point they will have to rebuild these capital buffers,” he explained. “Future provisioning needs are particularly uncertain, and banks may be mindful of investors’ perceptions and ultimately their cost of capital.”

Mr Watters concluded: “The ultimate size of credit losses depends on the speed and magnitude of the rebound, becoming evident only once payment holiday schemes wind down. All in all, bank provisioning will likely peak in the second or third quarter but could persist at an elevated level well beyond this.”

Report: S&P Credit Conditions Europe – Curve Flattens Recovery Unlocks