Banks that six months ago were falling over each other to lend money are now bunkering down. Stock markets that were surging have plunged and merger and acquisition activity has all but dried up. It is enough to make any CFO fret ­ but KCOM’s Paul Simpson isn’t panicking, he has seen it all before.

He joined the telecom and internet provider in 2000 in a business development role months after it had made its debut on the FTSE 250 as part of the dotcom boom. Its share price was 225p at that time.

Then known as Kingston Communications, it briefly reached the heights of the FTSE 100 as dotcom fever drove the stock price to 1592p, valuing the company at £56bn at its peak.

A year later things had changed drastically. Markets began to unpick the assumption that simply investing massive sums in its infrastructure would guarantee revenue success. Of course, the dotcom bubble burst and Kingston Communications was dragged down with the rest of its ICT peer group. Seven years on and KCOM Group is a small cap stock trading at around 50p to 60p. The days of FTSE 100 glory and £15+ shares are a distant memory.

‘It was an incredible period of growth and there was great expectation of huge upside for our entire peer group,’ Simpson reflects.

‘Nobody knew exactly how the internet business model would work and create value, but capital was free and markets were throwing money at businesses. If you didn’t invest fast enough, it was assumed someone else would nip in and take your space.’

But as the capital stampede into technology stocks started to slow in 2001 and 2002, Simpson knew it was time to make some tough decisions, recalibrate expectations and set the business on a sustainable footing.

‘People started to say yes, we have invested in infrastructure, but where is our route to success? If you go back and look at the 2000 period the growth forecasts and market expectations were unachievable and obviously there was going to be a fall-out,’ he says.

Simpson’s role changed from looking at growth and investment opportunities, to focusing on financial performance and delivering returns on investment. It was a change that would eventually lead to his appointment as chief financial officer in 2004. ‘My role went from being very externally focused to internally focused. It was not about closing anything down but resetting expectations and realigning resources,’ Simpson explains.

Humble beginnings

The background to KCOM must be one of UK business’s most unusual stories.

KCOM Group, formerly known as Kingston Communications, is unique. Formed in 1882 when Hull City Council first bid for telephone licenses, Kingston Communications became one of the first municipal-owned telephone networks.

When all the other municipal-owned networks were absorbed into the Post Office Telephone Network, which would eventually evolve into BT, Hull held on to its licence and to this day it remains the only part of the UK with a telephone network that is not serviced and maintained by BT, a fact visibly demonstrated by the cream rather than red telephone boxes that line Hull’s streets.

But its rapid growth, fuelled by its move into internet services ­ and market optimism in internet-based business models ­ proved impossible to handle.

‘One of the problems for any company that grows from something very small to very large in a short space of time is that the focus is always in the next wave of growth, rather than taking time to ask what the business will look like when the growth stops.

‘Capital markets have their role to play in that, because they put pressure on a business to keep growing and don’t always understand the need to take stock.’

Experiencing the hype and subsequent fall of the dotcom bubble first hand has helped Simpson to develop a more sanguine approach to the vagaries of stock market movements.

He does not panic when the price drops off and he doesn’t get too excited when it shoots up, but he always keeps an eye on it and looks at what it is saying.

‘Your share price does tell you something. It tells you about sentiment, about the general economy and the belief in your strategy. It can be frustrating when it falls and you feel it should be higher, but it is foolish to react to every market movement.
‘Fundamentally, you need to stick to your strategy,’ he says.

Indeed strategy has been the key focus for Simpson and he has played a key role over the last four years in positioning the business to target the business market, offering a suite of services to customers and to differentiate itself from giant players BT and Cable & Wireless.

This strategy culminated with the company renaming itself KCOM, as the company sought to streamline its structure following a series of acquisitions over the last four years.

During this time the company acquired business internet service provider Eclipse Internet, data networking group Omnetica and network storage specialist Technica. The company then purchased business applications integrator Smart421 and converged-IP contact centre JAM IP.

‘Over the last few years we have invested heavily in acquiring skills to increase our capability in the corporate space. We are targeting this market because it has great growth potential and we can offer a good quality service and a range of solutions.

‘There are two large network operators in the UK in BT and Cable & Wireless. We couldn’t compete there, so our route was to invest in a different set of skills and services and provide a different proposition,’ Simpson says.

He is confident that the group is now ready to deliver on these plans. After a busy period of acquisition and repositioning, the business has been renamed and its structure simplified. The forecast now is to deliver earnings growth and margins of 7-10% by 2010, which will place the group at the top end of its peer group in terms of return on investment.

Despite the credit freeze and economic slowdown, Simpson says these targets remain in place and achievable.

‘If people are concerned about the economic environment, confidence is lower. Businesses may step back and delay investment, but equally, as businesses are forced to look at how to become more efficient, technology becomes an enabler.

Rather than focusing on businesses holding back on investment, we need to focus on the ones seeking efficiencies,’ Simpson says.

He also believes that although access to capital is tightening, it will not dry up completely: ‘Banks are in the business of lending money. The returns may be tighter and they may be more selective about who they lend to, but the capital is there. You also need to keep in mind that there are still large corporates out there returning substantial sums of cash,’ he says.

Simpson is clearly not about to get too down about the economic gloom. He has, after all, been there before.

Local connection

There are not many companies that are as entrenched in their local community as KCOM Group. The company has been a core part of the Hull community since 1882, when the Hull Council bought up one of the first ever telephone licences.

To this day Hull remains the only town that has a telephone network that is not owned by BT, with KCOM Group looking after its telecommunications needs. KCOM is also the sponsor of Hull’s football and rugby league teams.

Until May 2007 the links between the town and the company were even closer. Hull City Council had been the owner of the company since 1882, and eventually floated a part of the business in 1999 on the London Stock Exchange.

Last year, after close to a decade of holding a large stake in the business, the council finally sold its remaining 30% holding.

For Paul Simpson, KCOM chief financial officer, the sale marked the end of a unique relationship between the board and the Hull City Council.

‘The council had two non-executive director seats on the board. The challenge was that local politics is quite different from running a business. We had a lot of movement in non-executive roles, and in some cases we had people who would leave the board and then come back on,’ he says.

The involvement of the council did not have much impact on strategy, however, but the exit of the Council has helped to improve liquidity in the stock and change City perceptions.

‘We now have a wider share ownership and because there is no longer one shareholder with a large stake that isn’t going anywhere, liquidity is much better. I also think investors now feel that we are more open to different strategies. Before that I think there was a perception that because the council was involved certain things couldn’t be done,’ Simpson says.