Unified comms is a shining star of the pandemic
In a year of uncertainty, unified communications continues to be a hotbed of M&A and investment activity
It was the year in which a global pandemic surprised the Western world with its scale and impact on day-to-day life. But 2020 was also a year in which communications technology demonstrated – and completely unsurprisingly for those familiar with its advances – how it can drive business productivity, especially in these unusual times. On 23 March 2020, many people across the UK went home to the shocking news that their government was telling them they must now stay at home. Not so long ago, this would have brought offices and business environments to a standstill. However, on 24 March many office workers opened their laptops, attached their headsets, and simply carried on working as normal. The changes to the way businesses communicate have been widespread and gradual over the last decade or so. Fixed-lines, PSTN (public switched telephone network) and ISDN (integrated services digital network) have been making way for cloud-hosted solutions centralised around computers (including smartphones) rather than fixed handsets and driven by software rather than hardware. The interaction between systems, often referred to in the context of "unified communications", has changed too. Today, communication may involve more than just switching between a conversation with one other person, a conference call bridge or a video conference for a group – and various different systems for written medium. Collaboration systems such as Microsoft Teams and Google Meet allow users to seamlessly add participants, to blend voice, video and text chat, and to interact with and amend documents simultaneously. Before the Covid-19 pandemic, these changes were led by demands for increased productivity, flexible working, resilience and security, as well as cost management. All of these demands remain – but with a global pandemic forcing a change in underlying working practices, they are even more necessary. Conversations on these issues are being had not just by information and communications technology professionals but also by company boards.
It should be no surprise then that strong investor interest has continued in managed communications providers. Shortly before the initial lockdown began, Osborne Clarke advised Focus Group on a strategic investment from Bowmark Capital, one of the highest-profile transactions in this space; 2020 also brought investment in Babble, Windsor Telecoms, Firstcom Europe and many more. Investors recognise the development of communications technology and growth in its adoption and use, but also see other benefits in the sector. Many managed communications providers operate a unified communications as-a-service model, which offers the benefits of a steady recurring revenue stream. Customers are often "sticky" and their churn is low: the services are in many cases relatively low cost and changing provider or systems is often not at the top of business priorities. Furthermore, the UK market, in particular, has few large providers and has evolved in a fragmented manner. Many of these (especially those at the smaller end of the spectrum) are owner-managed businesses with shareholders who intend to grow the business and exit. This is often exacerbated, as it is now, by external factors such as the ongoing speculation around changes to Capital Gains Tax rates and potential losses of reliefs available to business owners. With comparatively low overheads involved in providing managed communications, well-targeted and integrated acquisitions tend to add directly to the bottom line, providing a strong return on investment. These factors create a huge opportunity for consolidation, and private equity or debt investment are often used to fund wide-ranging acquisition strategies. Looking forward, a similar picture can be expected in 2021 and beyond. The adoption of collaboration technologies is likely to continue apace amid the expectation of further lockdowns and interruptions to "business as usual", the investment in and improvement of infrastructure (in particular, the increase in connection speeds due to the rollout of fibre) and plans to switch off PSTN and ISDN in 2025. The opportunity for consolidation and adding low-risk, highly synergistic acquisitions will continue to drive M&A among service providers. And, in a turbulent economic environment, the consistency and opportunity in the managed communications sector will remain alluring to investors.