UK carrier avoids Ofcom regulatory action by making £2.5 million of ‘goodwill’ payments

When two companies merge, effective management of the integration of IT systems is often critical. When the systems in question control customer billing, and billing is subject to regulation, mistakes can be costly, not only in monetary terms but also in reputational damage.

The Carphone Warehouse was founded in the early days of mobile telephony (when mobile phones were so bulky you needed a car…) and built a very successful business and brand based on impartial advice and customer service. In 2003 it branched out from selling mobile handsets and contracts to selling own brand telephony and broadband products under the TalkTalk brand. Unfortunately, its experience of running retail outlets did not prepare it for the process intensive business of a retail carrier, and soon after launch it found itself on the receiving end of consumer activism with (now-defunct) sites such as ‘MyTalkTalkHell’.

TalkTalk was demerged from Carphone Warehouse in 2010, but is still living with the legacy of its £236 million acquisition of Tiscali in June 2009.

In July 2010 Ofcom opened an investigation as to: ‘whether the TalkTalk Group has contravened General Condition 11.1, which prohibits Communications Providers from billing customers for services that have not been provided’.

In November 2010, Ofcom: ‘determined that there are reasonable grounds for believing that since 1 January 2010, TalkTalk Group has contravened, and is contravening, GC11.1 by issuing bills to customers (end-users) for services that have not been provided (in particular for cancelled services).’

Ofcom then required TalkTalk to undertake a series of remedial measures and to compensate customers. Those compensation requirements were significant, and included:

  • providing refunds of all sums paid by end-users to the TalkTalk Group for which it had billed them in contravention of GC11.1;
  • in relation to any affected end-user whose credit rating has been adversely affected by steps taken by or on behalf of TalkTalk Group, or by any party, in connection with its contravention of GC11.1, taking the necessary steps to repair the affected credit rating, including but not limited to applying to have any relevant court judgment set aside and notifying relevant credit reference agencies;
  • in relation to any affected end-user against whom TalkTalk Group has instituted legal proceedings to claim monies purportedly owed, withdrawing forthwith from such legal proceedings, and paying the end-user’s reasonable legal costs in resisting the claim; and
  • paying an appropriate amount to affected end-users in respect of annoyance, inconvenience or anxiety to which they have been put.

In addition, TalkTalk suffered significant brand and reputational damage from adverse press reports. Despite TalkTalk taking significant remedial steps and paying out almost £2.5 million to 62,000 customers in refunds and goodwill payments, the matter is not yet closed and Ofcom continues to receive customer complaints and indicated yesterday that it may take further action including imposing a financial penalty.

Whilst it is easy to look at this issue as a regulatory issue, for me the wider lesson is the importance of good diligence and post-merger systems integration planning.

Financial technology, cloud, mobile data and social networking will drive deals and valuation multiples in technology sector

As a new blogger, site statistics are a source of endless fascination.  They are however useful – my post on TMT valuation multiples seems to have been wildly popular, so I thought it worthwhile to trawl through some other reports to see what commentators were predicting.

PwC‘s technology insight presentation caught my eye.  It is a perceptive commentary on M&A trends in the technology sector, not only identifying hot areas, but also the drivers behind those hot-spots.

The first area identified is financial technology, with ongoing regulatory scrutiny and change within the banking vertical driving demand for integrated software and outsourced platforms. They highlight the Misys acquisition of Sophis as an example of this type of deal.

The second area is cloud services and the various activities within that space such as hosting, virtualisation and security. Reinforcing the theme of my last post, PwC sees relatively high valuation multiples for deals in this segment.

The third area is mobile data, which again is something of a recurring theme for this blog. The sub-segments highlighted include applications, gaming and advertising – all of which I agree with based on the recent deals we have seen.

I am less convinced with their last identified area – that of the public sector. As a result of the cuts in the UK, overall revenues are likely to fall so I would see deal activity being primarily defensive and with somewhat depressed valuations as compared to other segments.

Finishing with a personal view on another hot-spots for the year,  one segment that I think will be very hot is social media, with both IPOs for the large players possible, and also mid-market deal activity as the larger players acquire smaller players for capabilities to integrate into their platforms.

Valuation multiples up in TMT sector: trade buyers are back for 2011

I get a regular selection of recent corporate finance deal activity summaries in my email.  Last week, I got one from Regent.  Their view was that with the exception of a dip in August, valuation multiples in the European TMT sector have steadily edged upwards over the year, with:

  • price / earning at 16 (as opposed to 14 this time last year); and
  • price / sales at 1.1 (up from 1.0 this time last year).

However, for me, the story behind the story (so to speak), is the return of the trade sale.  The IPO market for tech companies has been ‘sleeping’ for some time (although with Facebook and LinkedIn rumoured to IPO for this year it is starting to feel oddly like 1999 all over again) and post-Lehman the lack of (as much) leveraged debt has removed one of private equity’s key advantage over trade purchasers. 

As a result the activity across the market (and certainly the cross-section of deals I am seeing) are, by and large, trade deals.  Expectations of slow growth for some time in European markets has led to sellers being realistic about valuations and my expectation is that 2011 will see continued deal-flow, with trade buyers and sellers predominating.