Hanging on to our key technology assests

26 August 2011 | By Andrew Czyzewski

Recent market events have re-ignited a debate at the very heart of the engineering and technology sector and arguably the UK economy as a whole.

There was no doubt a sense of déjà vu for many of ‘our’ companies as software Autonomy agreed in principle to a £6bn ($10.2bn) takeover deal from US computing giant Hewlett Packard.

It will be the largest takeover of a FTSE 100 company since Kraft bought out up Cadbury for £13bn early last year.

Predictably there were those who read it as just another example of predatory foreign companies pillaging our prized assets – and the slightly newer phenomenon of UK tech companies in particular selling out too early.

Shadow business secretary, John Denham, said there might be a case for looking at whether companies with high value intellectual property should be protected from foreign takeover, going on to criticise financial backers of technology startups who insist on a sale of the business to recoup their investment.

Tony Burke, assistant general secretary for manufacturing at Unite went further, warning that it could lead to new technologies and skills ebbing out of our economy.

The sale certainly chimes with a study published this month by the Cambridge University’s Institute for Manufacturing which found that 42 per cent of high-growth companies in high-technology sectors in the Cambridge cluster (sometimes referred to as ‘Silicon Fen’) were acquired between 1998 and 2008 – double the rate in the 1980s. Tellingly, almost half the acquiring companies were foreign.

Perhaps, understandably Autonomy’s chief executive Mike Lynch countered the naysayers, saying they demonstrate a fundamental lack of understanding of the sector. (I should point out for the record that Lynch is set to net somewhere in the region of $820m off the back of the deal).

He argued in the case of companies such as Autonomy, with such cutting edge research and development, that the engineers themselves are the assets and the knowledge they have can’t simply leak abroad. Although based on that logic, one might question what HP have actually got, especially since they plan to move their whole business model more towards software.

Neverthless, it’s certainly worth examining Autonomy’s case in more detail and the remarkable success story of an engineer taking a great idea and having the courage to persevere and make it an undisputed market leader (Alan Sugar, take note).

It was whilst he was completing a postdoctoral thesis at Cambridge University in the early 1990s that Lynch began honing the mathematical formulas that underpin the firm’s software. Interestingly, he was apparently encouraged to move into investment banking, at a time when that sector was coming up with the new and exotic financial instruments that ultimately crippled the world economy (showing that poaching of engineers to the dark side is not a new phenomenon).

But thankfully he instead accepted a £2000 loan from a music executive he met in a pub which kick-started the formation of Autonomy.

The company’s software essentially uses adaptive pattern recognition that is able to search unstructured information such as emails and instant messages, as opposed to data in columns and rows.

Even for those in the know it’s difficult to get a sense of the unique aspect of the company’s product and its business model – which is part of the reason why Lynch says Autonomy has been previously undervalued and overlooked as simply a service company by many in the City and Westminster.

But the client list speaks for itself, including security agencies, NASA, most major banks, and many household name coorporations. And crucially, there is still room for further expansion with Autonomy citing the fact that some 80 per cent of data on the internet is unstructured.

So what will be done with these vast sums now sloshing around Cambridge and how will it impact the rest of the technology and engineering sector?

There is much talk of the ‘virtuous cycle’ at the heart of Silicon Valley – essentially describing the supportive network and environment for start-ups. As the mantra goes, each generation of startups creates new wealth that is ploughed back into the next generation through venture capitalists and angel investors. High net-worth individuals with a sound understanding of how technology actually works help budding entrepreneurs start their own companies.

But rather than a virtuous cycle, some have said the UK’s model more closely resembles a vicious one with our companies only reaching a certain point of growth before being stymied and bought out.

We should be patient though. The process takes time – some 30 years in the case of Silicon Valley.  And let’s not forget that the UK has some fledgling tech areas including Silicon Fen with ARM and Autonomy among them, as well as an area of east London with more than 500 startups affectionately known as ’Silicon Roundabout’.

But back to the original question. Clearly we can’t have complete protectionism but by the same token you cannot simply just sell to the highest bidder. Rumours are already circulating about a takeover of ARM by Intel or Apple. For a company that has held out so long it would be crying shame for it go the way of Autonomy.

There has been some talk of the ’poison pills,’ – defence mechanisms against takeovers sometimes used by US companies but not available to their UK counterparts.

Perhaps all that is needed is a level playing field?