David Pattison, senior analyst and author of the 2011 Plimsoll Analysis explains, “Now that the storm is lifting we have been able to assess the damage left behind. 296 companies are in parlous state and starting the New Year clinging on for dear life. We have rated them as Danger accordingly. Falling demand was the final nail in the coffin for many. The mistake they made though was to not make those painful cuts early enough to protect their business”.
However, the green shoots are now well entrenched with the number of companies rated as Strong rising to 430. Pattison explains, “We rated these companies as Strong in our latest report and I have to congratulate them. In fact, many of them retained a Strong rating throughout the recession. They have managed to be commercially successful without jeopardising their financial stability. While others fail around them, they are in pole position to capitalise in 2011.”
When pressed on what these contrasting fortunes mean for the UK Telecommunications Services industry, he offers the following 4 points:
Getting back to growth will be paramount this year as costs and overheads continue to increase. Without growth companies will have to reduce overheads dramatically. Companies need to look to beat the current average profit margin of 3% if they are to cover costs and invest in other growth areas.
Identifying these growth areas will be vital as the market grows slowly. A group of 282 companies are leading the way with growth of over 10%. With bank funding still scarce, fast growing companies will have the resources and business model to further exploit exciting new opportunities.
The 296 companies we rated as Danger will be increasingly squeezed out of the market as they are simply not competitive in the current economic environment. Even their attractiveness as an acquisition is diminishing as new growth areas look more exciting. Watch out for a wave of corporate failures among these companies in 2011.
Mergers and Acquisitions will continue but the profile of companies involved will shift. There will still be distress sales this year as companies buy struggling competitors on the cheap. However, there will be a return of more strategic acquisitions as larger companies look to buy into growth areas in the market. The new Plimsoll Analysis has named 137 distressed companies that could be bought for a discount and a further 104 fast growing companies that are sure to attract the attention of the larger players in 2011.