The Latest Update on Insolvencies Within the Technology Sector
The UK ICT market (devices, networking components, applications and systems allowing people and organisations to interact with the digital world) performed well in 2016, growing by 4.5%. However, uncertainty caused by outcome of the EU referendum, a drop in the value of sterling, thin margins and strong competition have stifled growth this year, according to research by Atradius. In its 2017 ICT Market Monitor, the trade credit insurer warned of a slowdown in consumer spending as well as long-term corporate IT projects being delayed that would almost halve growth levels within the sector, from 4.5% in 2016 to 2.6% this year.
Strong competition within the ICT sector has also caused already thin margins to be squeezed further and although insolvency levels are expected to remain “average” this year if businesses fail to face and adapt to these challenges, this will almost certainly increase the likelihood of business failure.
“Currently, the main triggers for defaults and insolvencies in this sector are increased price pressure and margin erosion due to heightened competition and lack of product differentiation. With minimal barriers to entry and new challenges arising, it is a fiercely competitive environment and businesses are being forced to compete on price as they also try to differentiate their offering to preserve already thin margins,” said Simon Rockett, Risk Services Manager for Atradius UK.
In spite of falling demand for hardware products, looking forward, the main growth drivers for the ICT sector are expected to be software and data services, including cloud computing, mobile apps and new technology, such as wearable technology.
The Problems Experienced in the Technology Sector
- Growth is expected to slow down in 2017 to 2.6% as uncertainty looms over the UK ICT market post-Brexit. As a result, consumer spending is softening and more new IT projects are being revised or postponed.
- Many companies are unwilling to commit to long-term IT projects and are holding off non-essential upgrades.
- The fall in the value of sterling has become a key issue for the industry since many businesses are importing/purchasing in euros/US dollars and selling in sterling. Major hardware vendors have raised their prices by up to 10%, in response to the devalued pound against the US dollar and higher import costs.
- Profit margins have deteriorated over the last 12 months.
- General demand or sales has deteriorated over the last 12 months.
Insolvencies in the Technology Sector
According to the report, the level of ICT insolvencies is “average”, and no substantial increase is expected in 2017. Financial conditions are favourable within the sector as dependence on bank finance is low as barriers to entry are minimal, the overall indebtedness of the sector is low and willingness of banks to provide credit is average. Nonetheless, a formal insolvency procedure may be on the cards for tech companies that have failed to resolve issues, such as increased cost pressures and margin erosion from strong competition and a lack of product differentiation.
Formal Insolvency Procedures
There are three routes that enable technology firms facing insolvency to continue to trade.
- Directors can get in touch with the company’s creditors to try to reach an informal agreement on repayment
- They can pay creditors formally over a fixed period by using a Company Voluntary Arrangement or CVA.
- The company can be placed into administration.This formal procedure offers the firm some respite from creditor action and enables the company to continue trading and its assets to be sold, if necessary.
- The company can also be wound up. This is where the company is closed and its assets are sold or liquidated and the proceeds are distributed to creditors.
High Profile Tech Insolvencies
In February 2016, the mobile commerce group Powa Technologies called in the administrators, putting 311 jobs at risk. Powa’s administration is considered one of the biggest, high profile failures of a UK tech company in the last ten years, and its collapse dealt a considerable blow to the UK’s image as an emerging tech hub.
London-based Powa was founded in 2007 and its app, PowaTag, raised a staggering $76m for the company. In 2014, Powa had a self-proclaimed valuation of $2.6bn, and founder/CEO Dan Wagner claimed that the PowaTag would turn the company into “the greatest technology company of all time”.
PowaTag was an app that stored credit card details to enable consumers to shop quickly by scanning QR codes, ads, etc., with their smartphones. Argos, JD Sports and Laura Ashley, amongst other major retailers had signed up for the new payment system and the future was looking rosy for Powa.
However, once the administrators were called it became apparent that Powa had raised a staggering amount of money ($200m in debt and equity in less than three years), but had also managed to burn through it and had very little to show. When the company finally collapsed into administration in February, Powa had debts of $16.4m and just $250,000 in the bank. Former employees have since told the press that its management team was dysfunctional and there wasn’t a coherent business strategy in place.
Seek Professional Help
If you’re a director of a technology business that is experiencing financial distress, it’s critical to seek out professional advice sooner rather than later to give your business the best chance of survival. For more sector-specific guidance on insolvency, please call 08000 746 757 or email [email protected], for free and confidential advice from one of our professional advisers.