In December 2020, Bytes Technology Group floated on the London Stock Exchange, priced at 270p per share. Within hours of conditional first -day trading, Bytes’ share price rose to 330p giving the business a market cap of around £780 million.
Bytes’ listing on the LSE marks the high point of a 20-year relationship with Moore Barlow. “When we started dealing with Moore Barlow,” explains Keith Richardson, Director, Bytes Technology Group, “our gross invoiced income was just over £40 million. Now it is nearly £1 billion. Moore Barlow have been our legal partner all the way through.”
Over the past two decades, Moore Barlow have helped Bytes with many different legal matters, including disposals, acquisitions, disputes and contracts. Moore Barlow’s suggestion (and implementation) of an employee shareholder scheme achieved exceptional results for the company. “As a consequence of the scheme,” continues Keith, “Moore Barlow enhanced our shareholder value by at least six times.”
Background
One of the UK’s leading providers of software, security, hardware and cloud services, Bytes Technology Group (BTG) enable effective and cost-efficient technology sourcing, adaption and management for organisations of all sizes and industries. The Group enjoys strong relationships with many of the world’s largest software companies, delivering latest technology to a diverse and embedded customer base. As a result, BTG have a solid track record of strong financial performance.
Bytes Technology Group comprises two leading brands, Bytes Software Services (BSS) and Phoenix Software. Whereas Bytes Software Services’ customer base is both private-sector and public-sector customers, Phoenix almost exclusively focusses on the public sector.
The company’s relationship with Peter Jeffery, Partner in the Corporate team at Moore Barlow, dates back to 1997, when Bytes was sold to its parent company, Altron, and Peter provided Bytes with legal advice. Since then, Bytes have undertaken a number of disposals and acquisitions, all supported by Peter and by Moore Barlow more widely.
Acquisition of Phoenix Software
A key piece of work saw Moore Barlow advising on the £35 million acquisition of Phoenix Software in 2017, Bytes’ main competitor in the market. In this, Moore Barlow’s knowledge of Bytes proved particularly beneficial, as Moore Barlow Partner Thomas Clark explains: “Because we already had a relationship with Bytes, we knew what to focus on and what the concerns were regarding the transactions. With both Bytes and Phoenix being Microsoft licence partners, we knew already knew exactly what areas Bytes would be concerned with, and we add a lot of value focusing on those, and know what to look out for”
Through work such as this, Moore Barlow has built up an in-depth understanding of the business. Of corporate partner Peter Jeffery, Bytes’ director Keith Richardson remarks: “Peter really knows and understands you, and that’s really important. He knows what you’re looking for and what you’re not looking for; his interest is in the business as a whole and in you as management, and he’s continually looking at the bigger picture. He’ll ask, where are you going? What are your longer-term plans? How are you incentivising?”
This last question concerning incentivisation proved particularly pertinent as, here, Peter saw an opportunity for Bytes to further incentivise their managers in a way that would support the business to achieve its longer-term goals.
Employee shareholder scheme
“Peter came to us with the idea, suggesting we look at a longer-term incentive plans to drive shareholder value.” explains Keith. “We were looking for something more to offer than an annual bonus, and Peter sent us a paper summarising employee shareholder schemes that we could put in place, which we took to our shareholders. The scheme was then implemented in conjunction with Moore Barlow, our accountants, our tax consultants and our holding company.”
“Employee share schemes,” continues Peter, “are a very effective way of incentivising management in a way that aligns their long-term interests with shareholders. If, for example, we start with a value of £10 million and agree that managers get nothing for that first £10 million, but get an excess for the next £10 million, then managers’ and shareholders’ interests are aligned. It’s a perfect example of solving a problem a business didn’t realise they had by bringing them a new idea.”
Essentially, the scheme enabled a group that had no intention of selling to use shares that maximised the net of tax benefits for the managers at a very low cost to the group.
There are different types of employee share schemes: people can be given actual shares, or they can be given options, where the recipient has the right to buy the company’s shares at some point in the future.
For Bytes, however, the clear advice was to issue managers with shares. Holding shares as opposed to options was important if managers were to have a sense of having skin in the game. Additionally, as there was an off-shore parent company, that in itself would have stopped Bytes being eligible for some of the other option schemes – but not the scheme that was ultimately put in place.
The goal was to incentivise managers over the next five years, by offering the scheme to a highly specialised team of managers, allowing them to benefit from a proportion of the increase in businesses over that five-year period.
This enabled Bytes to use shares in a tax-efficient way to ensure their managers had a well-deserved net bonus, which pleased the employers because it didn’t cost them lots of money to secure the managers their net bonus. It wasn’t without its complexities, though, as contracts had to be well-drafted so that the parent company retained adequate control and could force managers to sell if need be.
Importantly, the scheme played a key role in ensuring managers’ and shareholders’ interests were aligned; managers weren’t just incentivised to work at their best, they also had the best interests of the business as a whole in mind. This translated into managers continually thinking about the bigger picture, not just thinking in isolation about their component part.
“Where others see problems, we see solutions”
Implementation wasn’t without its hurdles. All legal matters were 100% watertight, but they ran into a significant accounting issue that would have hit the profitability of the business. “Peter was extremely proactive in trying to solve the problem,” recounts Keith. “He is very solutions-focussed, with an interest in getting the right results. He doesn’t just take the legal view, he takes the practical view, helping you to solve the problem without exposing you to unnecessary risk.”
Peter Jeffery adds: “We’re there with them, as if we’re part of the business. Lots of things go right, and lots of things go wrong, and we’re there to help with both. When others see problems, we see solutions, and look for practical answers that help a business commercially.”
The shape of watertight
A similar share scheme was then implemented for Bytes’ subsidiary, Phoenix Software.
Here, Moore Barlow had to navigate another set of complexities, building in all sorts of different scenarios to ensure the scheme was watertight. In particular, as managers would have shares in a subsidiary company, any potential buyers would need to be sure they could call their shares in and retain control of that subsidiary.
LSE listing
Moore Barlow then supported Bytes Technology Group (BTG) in preparing for their listing on the London Stock Exchange. Bytes Security Partnership and Bytes Software Services were merged into one, meaning that Bytes Technology Group (BTG) now had one trading subsidiary rather than two.
A similar process was undertaken for Phoenix Software, who merged with their sister company Licence Dashboard.
Here, too, the shareholder scheme proved beneficial. Keith explains: “Bytes Technology Group have always run a federated model; when we acquire a company, we retain the management and we let them run themselves as an independent business as we don’t want to destroy that company’s culture or the people.” The introduction of the shareholder scheme propelled the overlap between the businesses into becoming greater and greater. “Alignment was easier, as we were already aligned,” concludes Keith.
Much of the work undertaken for Bytes linked to the mergers was handled during the first month of the Covid pandemic in 2020. Moore Barlow did all the documentation, paperwork and contracts, as well as advising on the potential risk of dealing with staff. “Any risks were calculated risks,” says Keith. “Moore Barlow helped us to work through everything to see what we could and couldn’t do.” Bytes benefitted from Moore Barlow’s wider expertise, in that different people with different specialisms were brought in depending on the nature of the transaction – most notably Corporate Partner Thomas Clark, Commercial Partner Dorothy Agnew, and Partner and Head of Moore Barlow’s employment team, Katherine Maxwell.
These are all people Bytes management know well. “Consistency of staff has been very important for us,” says Keith. “It’s proved really valuable, whether we’re doing an acquisition or buying the building we’re currently in. We’ve dealt with a cross-section of people, from litigation experts to the HR team, and it’s a trusted relationship. You feel you can pick up the phone any time.”
This work also included advising Bytes management on the closing down of the employee shareholder scheme, a scheme that ultimately saw shareholder value increase from under £50 million to a listing of nearly £800 million.
Bytes see their LSE listing as marking the pinnacle of their partnership with Moore Barlow over two decades, a partnership set to continue as BTG goes from strength to strength. “As our legal partner, Moore Barlow has helped us achieve so much more than we anticipated 20 – or even five! – years ago,” Keith concludes. “It’s been very successful for us.”
