Tech won’t be shielded from financial fallout
Share prices of most of the technology bellwethers closed down Wednesday as the U.S. stock market continued to digest the troubling financial news of recent days: Lehman Bros. Holdings Inc. filing for bankruptcy protection, the feds bailing out insurance giant American International Group Inc., Bank of America Corp. picking up Merrill Lynch & Co. for a fraction of its value, and other banks rumored to be in buyout talks.
It may be a bit premature to ask this question while we are still swirling in Wall Street’s vortex of confusion, but: Will this crisis lead to less spending on products and services from technology companies? After all, the information technology sector is important, and its sudden decline at the beginning of the decade triggered an economic downturn.
The Nasdaq composite index tumbled nearly 5% on Wednesday and is down nearly 21% since January.
But analysts say tech should weather the storm and won’t be plunged into crisis by the financial-sector consolidation. Spending will be tight for corporate America, they say, but the right kinds of tech firms should do fine.
Companies are setting their budgets now for 2009, and they are going to be conservative when it comes to spending, said Scott Kessler, an equity analyst at Standard & Poor’s. Still, he said, “technology has become an essential utility for the operation of businesses.”
But there will be winners and losers.
Clearly, any firm that serves Wall Street exclusively has known for a while that it was facing trouble. For example, about 40% of India’s IT outsourcing business, or roughly 180,000 workers, is focused on serving the tech needs of the U.S. banking and insurance industries, said Alok Aggarwal, co-founder and chairman of Evalueserve, a market research company. Many mortgage processing operations in India have already shut down after the troubles of Fannie Mae and Freddie Mac.
Although Aggarwal says his firm hasn’t been directly affected, he too is worried. “There will be banks not spending as much on marketing this year,” he said.
Others facing trouble are pure hardware companies, which “will face a higher revenue erosion,” said Ashok Kumar, an analyst at investment bank Collins Stewart.
And, no matter what they sell, small firms might have a harder go of it.
“Companies want to sign on with vendors they know will be around in years to come,” Kessler said. “There’s nothing worse than picking a great product from a small company and see a tsunami wash them out to sea.”
Ergo, the winners should be the giants, such as IBM Corp., Hewlett-Packard Co. and others that offer a mix of hardware, software and services to a variety of industries around the globe. The crisis on Wall Street could offer an opportunity for any technology or service that helps the financial industry with a changing regulatory environment.
That could be especially true as regulations increase, making companies pine for the days of simply tough oversight.
“Compared to what it will be like, they will remember this time as one in which they were relatively unfettered,” said Ellen Carney, an analyst at Forrester Research.
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