Opinion: Emmet Keating

I noticed this week that IMRG and Hitwise have just issued the latest version of their Hotshops Top 100 list, which highlighted to me a couple of key trends in the online retail sector that I've been following in my own research.

While the electrical and travel sectors are most strongly represented among the Top 100, the clothing sector has grown in prominence in recent years as workloads continue to put pressure on consumers’ weekend leisure time. For example,

• ASOS is one of the fastest growing businesses in online retail (#15 in 2010; #50 in 2006)
• Marks & Spencer’s high street rejuvenation has been supported by its online channel (#7 in 2010; #23 in 2006)
• Next has used its online channel effectively to maintain its position (#8 in 2010; #14 in 2006) Plus several other online clothing retail newcomers to the Hotshops Top 50 include New Look, TopShop and River Island

In particular this report highlighted the convergence of online and high street retail, with 33 of the top 50 online retailers having a physical presence on the high street to support their online offering, a figure which compares to 23 multichannel participants in 2006.

While this trend may continue as the larger online retailers become more established and their business models become more predictable, the pureplay online retail channel remains an attractive route to market for emerging SME retailers, with businesses such as MandMDirect and Figleaves growing strongly.

My-Wardrobe recently capitalised on the heat in the sector, in spite of the current recession, through securing $9m from venture capital investors Balderton Capital and Angel Investors. The online fashion store is seeking to use this additional funding to drive growth into international markets.

I'm sure My-Wardrobe won't be the last deal to happen in this sector this year.

Will there be an immediate ‘aftershock’ impact on the UK healthcare IT market following US healthcare giant Allscripts-Misys's acquisition of Eclipsys Corporation in a £1bn deal. With Allscripts-Misys’ historic physician (American equivalents of GPs) customer base being linked with Eclipsys’ hospital customer base, the combined entity appears very well positioned to capitalize on President Obama’s drive for increased use of IT within the US healthcare system. The merged entity will now be the second largest healthcare IT firm in the US, behind Cerner.

What will be the immediate ‘aftershock’ impact on the UK healthcare IT market? On the face of things, perhaps not – Allscripts/Misys have been focused on their own integration since their merger in 2008, Eclipsys are not particularly known for driving an international M&A agenda, and there should be much opportunity for the combined group on their own patch in the next year or two.

However, I did recently have an interesting chat with Stuart Miller, Regional VP for Eclipsys UK & Ireland, and he did sound relatively bullish about the evolution of Eclipsys’ UK activities, particularly with the change of government. Whilst it will likely take a few months of focus for the integration strategy of these giant entities to be firmed up, I doubt that the enlarged group will be short of a few bags of gold to develop an international presence, and I would not be surprised if it turned its attention to global healthcare economies seeking their own joined up healthcare IT solutions before too long.

It is clear that major changes lie in store for the National Programme for IT (‘NPfIT’) as David Cameron invites Nick Clegg around for tea at Number 10 to thrash out details of the forthcoming Emergency Budget.

Last week, sector journalists reported of a letter from the Chief Executive of NHS North West to PCTs in the area outlining that they are now free to “get off the Lorenzo bus”. With Tory commitments in response to a 2009 review of the NPfIT including statements such as:

• ‘halt and renegotiate Local Service Provider contracts’
• ‘dismantle the central IT infrastructure’ and
• ‘encourage PCTs but not impose IT systems on them’

and with the Liberal Democrat view relatively well aligned with that, it seems clear that new government policies will dictate that PCTs will no longer be forced to choose between Cerner’s Millenium and iSoft’s Lorenzo systems. These actions would be received positively in the market, with the delays in delivery of iSoft projects in particular making ‘Lorenzo’ the dirtiest word in Healthcare IT at the moment.

I spent some time at the Healthcare Computing 2010 event in Birmingham last month and gathered a range of views on the prospects for the NPfIT from sector experts, and it certainly seems to be the consensus view that a storm is brewing. McKesson are bringing their Paragon product to the NHS, and Eclipsys are back on the sidelines waiting for the optimum time to re-enter the UK market. These US giants, along with midmarket providers such as Clinical Solutions, Alert and Intersystems all stand to benefit as the market opens up with PCTs operating more flexible IT procurement policies.

Let’s hope that Andrew Lansley (the new Health Secretary) will indeed empower PCTs to take action at a local level – this should drive genuine opportunity for ambitious players in this market.

For those who seek to achieve growth in this sector through corporate acquisitions, the currently fragmented market presents a wide range of options, and I for one am expecting M&A activity in this sector to ramp up significantly in the near term as a result.

Whilst "Cloud computing" has been a buzz phrase for several years now, there is no doubt in my mind that the private equity industry is increasingly growing interested in this key market.

For those not already in the know, Cloud computing is a revolutionary new form of computing whereby technology infrastructure resources are shared using the internet rather than housed in individual organisations, both physically and conceptually. IT users in the future will request the use of a service (through the internet) rather than a server (physical machine in a storage room). This new delivery model for IT services maximises the efficiency of IT resources, and has the potential to revolutionise the IT services industry, saving vast costs in the process.

The importance of the Cloud concept was brought home to me recently reading the government's report outlining its vision for ICT, incorporating a ‘government Cloud’, or ‘G-Cloud’, within the national public sector ICT infrastructure.

The key barrier to delivering this vision is security. As we all know, security of government data is of critical importance, and has been one of the key inhibitors of cloud computing in the UK, with cloud infrastructure not considered as safe as secure server infrastructure. The argument is that by outsourcing IT infrastructure we outsource control of our critical data.

With cyber-terrorism and cyber-security continually rising up the agenda, security within the Cloud for government data is of critical importance to enabling the Cloud revolution. However, the business case for embracing Cloud computing is so compelling (organisations will be able to save on capex costs associated with hardware and software and will simply pay for the overall service based on their usage) that IT security teams within large corporates are simply being tasked with maximising the security and reliability for Cloud computing, rather than deciding whether or not it is appropriate.

As the IT security concerns subside, I am sure we will see a spate of investment in businesses specialising in Cloud computing technology, particularly those involved in the G-Cloud, considering the pressure on the public sector purse and the associated boom in public sector outsourcing post-election predicted in early March by outsourcing industry leaders Capita and Logica.

Healthcare IT is developing into an increasingly key part of party manifestos ahead of this year’s general election, with David Cameron for one pledging a transformation in the way UK patients manage their health records.

I'm struck by the fact that criticisms around the potential hosting of online health records by large multinational IT giants such as Google (www.google.com/health) and Microsoft (www.healthvault.com) have been deflected away in Conservative plans from talk about the identity of the future provider (which could include a wider roll-out of the NHS’ existing online records database, Healthspace www.healthspace.nhs.uk) and back towards the overall concept of patients taking some responsibility for the administration of their own healthcare.

One of the soundbites for example that I've read is that the Conservatives are suggesting that “you’ll be able to check your health records online in the same way you do your bank account”.

The question that needs to be answered I think is how much operational benefit would this actually derive? Asking a bank cashier to print out a bank statement or transfer funds from one account to another is somewhat less complex and less unique than asking a health professional to address a personal health need.

Last summer the DoH held back from investing c.£80m into the development of Healthspace, the case for which was based on making it a hub for transactional services, enabling patients to undertake certain actions such as booking primary care appointments, ordering repeat prescriptions and completing pre-registration assessments online. The concern was over the value to patients of having an online health record, evidenced by the fact that at the time, less than 1,000 people had actually activated an online health record on Healthspace.

There is no doubt that service provision can be enhanced by IT, and my work on the recent sale of ScriptSwitch (which works simply as a single ‘Yes/No’ popup at the point of prescription to help GPs save cost for the NHS as well as monitor compliance) has only reinforced my belief that this is indeed the future. Indeed I'll be amazed if this isn't a market that sees considerable M&A activity over the next couple of years as technologies and providers jostle for position.

However, much as I do love technology, I am a big fan of ‘baby steps’ when it comes to driving improvements through its use. Following the ongoing confusion generated by the current National Programme for IT, I am left feeling at present that I am not the only cynic when it comes to ‘big picture’ government healthcare IT agendas.

In recent weeks Electronic Arts Inc has acquired Playfish, the UK social gaming business for up to $400 million ($275 million in cash; $25 million in shares and up to $100 million in a two year earn-out).

Phrases such as ‘dramatic transformation’ and ‘tremendous growth’ are coined too often; however these appear to be understatements in this case!

Playfish is two years old and for the 15 months ended 31 December 2008 reported revenue of £1.6 million. This is estimated to have risen to in excess of £40 million for 2009, and Playfish now have circa 60 million people playing their games each month. Now that is growth!

Playfish’s games are typically free to play - they make money by selling virtual items within their games. The fact that approximately 21 million people played Pet Society last month, a game which involves paying cash to accessorise virtual pets, really makes me wonder whether we will be having any real-world relationships at all in 20 years time. I suppose at least virtual pets do not mess up the house!

There has been some controversy over the methods by which some of these social gaming businesses - others include Zynga and Playdom - generate their revenue (some press reports on their gaming platforms discuss small-print scams in some of the offers presented within their games, meaning spurious items appear on parent’s phone bills across the world). However, I am certain that Electronic Arts’ diligence and treasury teams will have got to the bottom of this before approving the release of $275 million.

This indeed is a sector of transformation, with Electronic Arts simultaneously reporting that there will be a c.16% reduction in their workforce to counter the recession (c.1,500 jobs). The pace at which social gaming is replacing historic console-based gaming is truly phenomenal.

I suspect that these redundancies will not be keeping the Playfish vendors awake late at night however, and the prospect of establishing an effective post-deal integration strategy (see my previous blog) would also not overly concern me if I had a decent share of $275 million in my pocket! Congratulations to the Playfish team – the British gaming sector has always been highly innovative, something I've seen firsthand in my own home city of Coventry at the admirably creative Serious Games Institute along with the cluster of gaming companies in the Midlands such as Monumental, Codemasters and Blitz.

I look forward to its next success story.

The cultural aspects of post-deal integration can sometimes be put on the back burner as the administrative elements of a transaction dominate towards the final stages of a deal process. However, these are often key to the overall success of an acquisition, particularly in the 'creative industries'.

This has been brought home in some recent Catalyst research into latest deals in the UK gaming software sector, which has historically been dominated by US giants acquiring specialist UK software development houses.

The UK has long been recognised as an international centre of excellence for gaming software development, which is why valuation multiples of c.2.5-3.0x Revenue and c.10x EBITDA have typically been paid for successful businesses in this sector. However, cross-continental cultural integration can prove a challenge, particularly where management (who had been used to control and autonomy in their decision making) are retained post-deal and are forced to adhere to head-office corporate policies.

In April 2008, Zoo Digital Publishing (which subsequently became Zushi Games), a Sheffield-based developer was sold to Green Screen Interactive Software Inc, based in New York. However, before the end of that year, management regained control via a management buy-out, citing that the business is "better off independent". There are other examples of UK gaming developers selling their businesses only to buy them back after discovering that their creative ethos was stifled by the new owners. One commented:

"They sell you the line 'you're going to have so much creative freedom, you can really just concentrate on the games'...you'll find out in a short space of time, just as we did, that you're very restricted".

In September 2008, Leamington Spa-based FreeStyle Games (creator of Guitar Hero) was acquired by Californian giant Activision Blizzard Inc (responsible for the Call of Duty and Tony Hawk series among others) and currently has a web page commenting that:

"One of the key drivers in our decision to sell to Activision is their independent studio model. This means that we retain our name, brand, identity and culture. Life goes on very much as it was and everything that people love about FreeStyle Games will stay the same".

I hope that FreeStyle and Activision continue to develop a harmonious and mutually beneficial relationship going forward. That will depend on the successful demonstration of these post-deal intentions towards cultural integration as much as anything else.