Numis’s EU move offers hedge against IPOs leaving London

City of London bankers know they are less important to the UK government than fish: this was made clear in the Brexit trade agreement clinched at Christmas. And if the fishing industry thinks it came away with a rough deal, the finance sector can rightly grumble that it was largely left to fend for itself. The decision by London-based investment bank Numis to open an EU office within the next 12 months represents a grudging recognition of this reality. 

Similar discussions are taking place across the City, as some holdouts give up hope that Brussels will designate parts of London’s capital markets as “equivalent” to its own, allowing for seamless selling of certain services. Even if these permits are granted, some see them as a shaky foundation for doing business, given the political risk that they are whipped away again. In the meantime, EU watchdogs have warned firms against misusing regulatory loopholes to sell investment services.

Opening an office in the bloc is, therefore, the low-risk option. Big banks put Brexit contingency plans into operation well before the end of the transition.

As smaller, London-focused players catch up, they face an additional layer of cost for what can be a fraction of turnover. Less than 5 per cent of Numis’s institutional revenues come from EU clients. Thus getting the size of its EU operation right will be just as important as its location, with both yet to be determined.

The pressure is not just to answer a regulatory imperative. Brexit effects on London’s secondary market for equities showed up immediately in January, as about €6.5bn of daily EU share trading departed for the continent. Primary markets might be slower to shift. Polish ecommerce group InPost jangled nerves by picking Amsterdam over London as a “neutral listing place” last month.

The City has had a quiet few years for capital-raising. For Numis, the revenue contribution from IPOs last year was its lowest in a decade. But optimists can cite the momentum provided by recent floats such as ecommerce company THG and online card seller Moonpig. Numis’s trading update on Tuesday highlighted the recent flurry of deals.

And with bullish markets lifting its equities trading and institutional stockbroking business, overall revenues for the four months to January were up about 50 per cent year-on-year.

An EU outpost will provide a hedge against any shift in issuance from London and allow Numis to put investment banking boots on the ground. But the challenge will be to win deals that it would not have won otherwise. Only then will the extra cost look like anything other than a Brexit tax. 

Micro machine

IT consultants call it Decision Latency Theory, writes Bryce Elder. The idea is that as soon as a computer system is toiling, a fix is more valuable now than later. A recent study examining why large IT projects fail found quick decisions yield better results than periods of corporate contemplation.

Micro Focus is a leading proponent of the theory, having long profited from people ignoring it. The computer language Cobol was already in its teens when the company was formed in 1976 to service its requirements. Yet because of upgrade inertia, decades-old Cobol systems remain mission critical across finance and government.

Vintage software maintenance once gave a stable core to Micro Focus, even after its former boss Kevin Loosemore pursued a private equity model and grew by acquisition into a jumble of unconnected divisions. Then came the pandemic, which forced companies into making quick decisions on cloud computing investment and loaded unforeseen pressure on to state machinery such as unemployment registers.

Full-year results on Tuesday showed the damage. Licence revenue from the main legacy division dropped 18.9 per cent to $470.3m in the year ending October. At group level sales slid 10 per cent to $3bn — though improvement through the year provided the first evidence of a clean-up operation that began when Loosemore exited a year ago. Among his parting gifts: a $2.8bn goodwill impairment charge related to the disastrous 2017 acquisition of HP’s software arm for $8.8bn.

Yet hidden inside a group loaded with acquisition debt and historically starved of investment, there are some decent businesses failing to shine through. These include ArcSight and Fortify, both security software makers, and Vertica, a database provider that uses data analytics tricks developed by Autonomy to deliver something similar to Wall Street darling Snowflake. Goldman Sachs values these divisions at about $2.5bn, or more than 40 per cent of group enterprise value.

Then there is Cobol. Expertise in ancient languages gives Micro Focus a bridge between legacy and modern software. In December, Amazon’s world-conquering AWS server division said Micro Focus was qualified to handle mainframe migration — an announcement ignored by markets but potentially significant to anyone responsible for room-sized computer equipment.

A turnround needs patience. Disposals may help stabilise revenue before a 2023 target date, but improving cash conversion and no debt falling due until a year later ease the pressure. It is a big project. This is no time for a quick fix.

Numis: ian.smith@ft.com
Micro Focus: bryce.elder@ft.com