We would love to hear your thoughts about our site and services, please take our survey here.
Foreign takeover is not a problem. You create a holding company in the relevant domicile, install a board of directors locally under local rules, with locally relevant auditors. All shares in holding company held by parent group company.
Then the holding company starts restructuring the former PLC into separate legal entities, roughly equating to keep / dispose / windup.
The question if it's profitable for a company to replace the debt with a more favourable funding and less restrictive than current bank covenants, trade it to FCF and sell the remainder for EBITDA x Some multiplier. As below, there seems to be a lot of IIs with significant holdings that would want to minimize their exit loss.
Lots of former colleagues and acquaintances on my LinkedIn feed in the last 2 weeks announcing their last day/week/month in Capita, quite a few at CEO-3 and one at CEO-2. Since none are reporting where they're off to, there has definitely been another round of thinning, presumably initiated early in Q1 on preliminary internal results.
I need to go have some coffees at this point if I'm to get details on the latest internal re-org, too long out of the loop.
I'm an ex-employee, a non-investor (in anything, other than my pension)
As others have said, forget the AI and automation fluff. That's huge investments for small gains as it has to be treated on a client by client basis. There was previous marquee transformations - namely O2 - but they had the scale for investment. Many contracts don't.
There's plenty of fat in good old-fashioned efficiency drives - centralisation, nearshoring and offshoring, sweating the management ratios. That will be the story of the next 18 months. I've said previously, I'm now hearing from colleagues that umbrellas put up by CEO-2 management previously are gone and more hardnosed redundancies are happening - less 'oh this person does special task X' and more 'these roles are eliminated / off to India, shut up and make it work'
@passingthru
https://www.forbes.com/sites/mollybohannon/2023/06/08/lawyer-used-chatgpt-in-court-and-cited-fake-cases-a-judge-is-considering-sanctions/
ChatGPT has already been shown to fabricate citations when it couldn't find real ones. AI Large Language Models are not precise systems, they're trained to produce or infer/suggest a solution. It's not a silver bullet to every problem, and in my opinion there's a lot of hype around the use-cases. It will do a lot, in time, but mostly as an assistant to work, not to take over work.
Separately, while I was at Capita there was a wave of optimism around chat bots etc, but in reality they deflected about 5% of contacts entirely. What they do quite well is to take initial information from users about the nature of their query, their accounts numbers etc, and speed up skills based routing of contacts to the correct team of advisors. In reality, human contact is king for customer service - it's what people want.
I'm not so sure the AI/Automation gain is clear cut.
1. Remember Capita's staff in the majority are client, or client-customer facing.
2. Quite a number of contracts are FTE-based, not everything is transactional.
3. They can't go willy-nilly changing the nature of Data Processing Agreements to put automated decision making in, nor can they wholesale start putting client data in the cloud without authorisation - particularly government data.
4. Bringing in AI isn't a short term project, and the costs of running AI are actually quite high
Where AI 1.0 and Automation (RPA) was part of a transformation in my Capita time, this was typically a gain-share model negotiated with the client, so they see some upside from assuming the risk of machine-augmented decision making. So you bring in the headcount at current costs, and transform over 2-3 years.
Automation has a run cost, AI a much higher run cost, so that has to:
1. Be delivered at scale.
2. Be agreed with clients, who will want a slice of the gain.
The rule of thumb for RPA is that at modest scale, the cost of running and maintaining your robots is 2/3 of the cost of the relevant workforce. I don't have costings for AI, I haven't been involved, but there's a high entry point, so I'm gonna stick with about 2/3 for now. If your client wants half the savings, that leaves you with 1/6 of a saving on your fully loaded FTE.
A fully loaded Capita FTE is probably in the region of £45k. If they manage to replace 10% of FTE, that's 5000*£45000*1/6 in savings = £37.5m.
They might well achieve 30% reduction in headcount and hit that 100m, if AI delivers on it's early hype/promise, but that will take 5 years of contract (re)negotiation and client churn to hit that saving.
"Too much has been made of the cyber attacks. 25m on 3bn is laughable it's spare change. Raising the lowest earners wages by 22% is beyond ludacris."
This could have been a lot worse, but there was already a quite extensive cyber program underway in Capita. At the start of this program there was some eye-opening lack of controls , but a lot is closed. The fact that a lot of verifiable work had been done over the previous 5 years would limit the exposure to an 'asleep at the wheel' type of finding.
The IT estate is still pretty old and very old in places by my reckoning (gone over 2 years), but avoiding big fines is more about having and accurate risk log, mitigation plans in place to reduce residual risk, and having credible funded programmes for improvements over a multi-year horizon.
I'm a disinterested party Trisor, I'm risk averse and don't invest in individual securities - at least not deliberately, RSUs are greatly welcomed from my current employer. I simply find the relationship between company performance, share price, overall market sentiment very interesting as it's not always grounded or consistent. Capita presents a fascinating use case for this as I worked there for a good number of years, including through the Carillion contagion and Covid.
But my 2c since you asked:
1. Clearly this stock is heavily discounted due to risk, risk of takeover and rip and strip, risk of insolvency due to no FCF or loan convenant breach, risk of further rights issues. I can understand why someone would take a long punt here with a disposable part of their portfolio, or be tempted into short term trading. Anyone betting the house needs their heads examined.
2. There's a lot of really obvious stuff underway since 2021 that doesn't need innovative solutions: Reducing real estate and sweating desk utilisation, leveraging existing offshore locations in India / Poland / South Africa for non-client facing operational control stuff, breaking cosy unit/LE fiefdoms and centralising core services.
3. Eventually, the harder to achieve stuff will come in and require investment, but based on the number of former colleagues taking redundancy packages, the necessary is well is underway.
4. It's hard for me to ascertain what other upward pressure is being applied to the cost base, but recent news abandoning living wages etc shows that they mean business, and know they need to get off the publicity campaigns and into bigger net margins and ultimately FCF.
5. The order book is unlikely to go down significantly - there are no new players at Capita's scale and government can afford to in-house all of these services. Private sector will ebb and flow, but no wild swings. They are ratining the European expansion, I hear that Ireland, Poland, Germany etc are part of the transformation, not part of the exit lounge, so some potential market in those countries presumably where Capita isn't as ubiquitous.
My guess? There's a 30p peak sp to be had near a quarter of FCF, 50p peak sp in two consecutive quarters, and a £1 sp if 4 good quarters could add up to a positive full year results in March 25. Given there'll be ebbs and flows, if I had to guess I'd think 50p after August is possible and then it might bounce around a while close to that level. Not for the faint-hearted.
Seems to be a lot of surprise here about performance issues on Capita contracts. Poor performance is not disputable, but in what industry, and in what country is outsourcing deemed a 'success'?
A few more facts about Capita which were as true at £2 sp as they are at £0.20 sp.
1. Outsourcing companies pay at or slightly above minimum wage.
2. Your average new employee is >50% likely to be one of: an early school leaver, someone returning to the workforce after a long absence, someone otherwise unemployed for various reasons. Quite often you are teaching them not only a role, but also how to behave and be an employee in the workplace.
3. The attrition rate in some parts of Capita can be as high as 100% i.e. enough joiners and leavers numbers to theoretically turnover the entire staff of an operation in 1 year. The 'norm' target is to keep it below 40%. That's a hell of a lot of newbies doing the job and making mistakes.
4. Governments and companies outsource to shake off their own minimum wage agreements, and to offset their own risk in managing large swathes of front and back office staff.
Let's get real here. Capita is built on doing all of the crappy little jobs that governments and companies don't want to do. They bid low and hire staff in areas of high unemployment like the North East to replace union protected public workers, financial services workers etc. Companies and government agencies offset risk and cost through business process outsourcing, everyone knows that 'scaling partnerships' etc is all marketing rubbish.
Bad news stories have been around Capita for a long time, and they often surround agencies/companies that do the work themselves too.
It's perfectly valid to have an ideological objection to outsourcing, and what it represents in terms of paring back post-war gains for the living conditions of unskilled and semi-skilled workers. I was well aware when I worked for Capita that I was part of a bottom-feeding service industry. However, it's a nonsense to suggest that (take your pick) any recent performance story is a sign of things falling apart. Operations hover between bare satisfaction, escalation hopping and crisis at all times because the client doesn't want to pay for the service they are demanding, and eventually pressure drives up employee attrition.
Long story short, it's an industry with crappy pay & conditions (bottom rung employees living below poverty line routinely), so there will always be high profile failures and complaints.
4 lost years about covers it, Culley.
I didn’t mention the cyber attack due to character limits, but there be dragons. Potential big one off there, but the noise is pointing to 8 figures rather than potential 9.There was a hell of a lot of old software in extended support, or just mitigated by enhanced security software. A bit technical for here, but there was a risk of a large data protection fine if someone determined controls to be inadequate.
As to future I’d expect Microsoft is helping there though. The big cloud companies tend to provide a lot of cloud credits against the consulting cost of upgrading and moving to the cloud. Think millions in cloud cost savings when you spend a few million on consulting because of the pretty much guaranteed vendor lock-in.
As to redundancies , per my previous post they are sharper now. But with Capita it’s important to remember that the vast majority of employees are bums on seats in profit centres. Like I said there was a good complement of inefficiencies between legal entities, with busy fools repeating due to a basic lack of integration, but talk of 4000 redundancies below is far fetched.
There was lots of talk of automation and AI for client facing services, but a lot of Capitas business is based on FTE and not transactional, so there’s gain share considerations with shaving client facing headcount typically.
By and large, there’s plenty of plain old bloat to trim - underway - without getting into opportunity plays in AI and automation, which should be able to deliver on the bottom line. The key challenge will be maintaining a growing order book while the necessary zeal is applied to cuts
Howdy. Long time lurker. Not a securities investor. Former employee at CPI (CEO-2 level), left of own accord. I have no agenda either as an investor, or as an ex-employee, but after a few years watching y'all squabble here, I finally registered to give a perspective.
1. Free Cash Flow was discussed constantly up and down the management tiers while I was there, and during Covid we also discussed banking covenants on a rolling 6 month basis. The management did well to trade through, and it was on everyone's mind.
2. The arm I worked for was a relatively recent acquisition when I joined,. The only thing integrated was Finance and HR. In those days, Capita was awash with companies that had been integrated for HR/payroll, P&L and very minimal core functions and IT. Tons of different email services, telephony systems, desktops, project teams and the whole lot. Duplication of everything from systems, to control functions etc. Lots of soft dotted-line reporting intercompany but not real oversight. Individually acquired businesses were offered integration (at a cost to themselves) but were equally empowered to reject it and continue on their own path. The only thing that mattered was revenue, EBITDA, FCF, and if you threatened a loss to do something, you could avoid it and operate semi-independently.
3. JL clearly knew there was no business case to fully integrate the random service companies. There was an initial re-org c. 2018 which created 6 units, one of which was called 'specialist services' for things that 'didn't fit in other areas'. It quickly became known as the 'exit lobby'. There was no synergy to be had by integrating the sales, operational control, IT, software engineering of these companies. They did, however, get on with obvious stuff like migrating Finance and Accounting operations offshore where necessary.
4. It bumbled along for a couple of years, still selling off businesses, and a new re-org happened in late 2019, early 2020 This re-org simplified further and promised 2 main units for government service, and experience (mostly contact centres), plus an internal core services function for IT, software etc. Separately 'Capita Porffolio' became the new exit lounge, and more stuff went in..
5. Covid hit soon after, and every entity did what they needed to survive, in many cases diverging on IT solutions etc even further.
6. After Covid, in early 2021, the transformation started for real IMO.
My initial experience was that the reorg was only about sales to restore the balance sheet, very little genuine boot was put into meaningful synergies for cost saving. In my last year there, and since, this had ramped up properly. Protectionism for individual units is gone, the business is being properly re-oriented with industry verticals, off-shoring of service teams. There is lots of talk of automation/AI but that's fluff IMO. It'll be slow, but FCF will arrive.