Wednesday, October 08, 2008

Tech Firms Prepare for the Worst

Technology companies and venture capitalists are bracing themselves for tougher times.

By Michael Fitzgerald

Credit: Technology Review

Ripples from the financial crisis on Wall Street are already being felt across the technology industry, with CEOs, entrepreneurs, and venture capitalists bracing themselves for much tougher times and considering how best to ride out the economic downturn.

Recent market turmoil has seen the technology-heavy NASDAQ drop almost 14 percent over 30 days. The fact that upheaval has hit even big technology stocks hard reflects concerns that an economic downturn will hurt these companies' bottom line.

But a more immediate pinch could be felt across the industry as a result of the tightening credit, says Andrew Lo, a professor of finance at MIT's Sloan School of Business. The difficulty of obtaining credit will "affect innovation," Lo predicts. "The capital is not there, and all investors will have a harder time raising funds."

The credit squeeze could prompt large technology firms that need plenty of capital to start looking elsewhere for extra investment, perhaps to countries with substantial foreign-currency reserves. An example of this approach came on Tuesday, when microprocessor maker Advanced Micro Devices said that it would spin off its manufacturing operations to reduce costs, using $6 billion from investors in Abu Dhabi.

Expect more deals like that one, says Paul Saffo, a seasoned Silicon Valley analyst and pundit. "Remember Japan buying America? This time, China's going to be coming in with the checkbook," he says. Such deals might stoke political controversy, but there will be little alternative for the businesses concerned. "When the white knights in the U.S. have no horse to ride, you know the deal's going to go through," Saffo adds.

Iain Cockburn, a professor of finance and economics at Boston University, notes that technology companies are normally more resistant to credit problems. "Tech tends to be less reliant on short-term credit," he says, adding that smaller tech companies and startups are relatively well placed to weather the impact of a downturn over the short term.

Even so, "if the short-term credit crunch doesn't get sorted out," Cockburn says, "projects that involve investments in new technologies [will] get postponed." He adds that established companies that have significant capital needs, like semiconductor firms and manufacturers, will also run into trouble.