The makings of another tech mess?

A shaky overall economy inevitably spells trouble for the tech industry. Here's a breakdown of how it could play out.

Jim Kerstetter Staff writer, CNET News
Jim Kerstetter has been writing about the high-tech industry since the 1990s. He has been a senior editor at PC Week and a Silicon Valley correspondent at BusinessWeek. He is now senior executive editor at CNET News. He moved back to Boston because he missed the Red Sox. E-mail Jim.
Jim Kerstetter
2 min read

The high-tech industry may experience a bubble every few years, but it doesn't exist in one. Bad news for the overall economy inevitably hurts the tech sector. Here's how it could happen this time:

Financial breakdown

The money mess
Mortgage foreclosures: The bursting of the housing bubble meant record mortgage defaults, which meant those notes were worthless to the financial outfits holding them.

Ruin on Wall Street: The ability of bright people to do dumb things never ceases to amaze, as several Wall Street stalwarts crumble under the weight of their bad debts, and banks such as Washington Mutual have to be rescued by the federal government.

The credit crunch: Banks don't trust each other any more than regular people trust the banks, so they won't loan each other money. When they do, it's at outrageous rates. That means the rates they charge to big companies that want to borrow in order to buy new tech gear or even start-ups that need to do things like pay their rent go even higher.

Slowing venture capital activity: In the second quarter, 56 tech transactions generated $4.7 billion, compared with 97 deals raising $8.8 billion a year ago, according to Dow Jones VentureSource. We're waiting on numbers for the third quarter, which just ended Tuesday.

Can tech spending be next? It's safe to assume tech spending in the financial industry will be more than low, but what about other industries? With big software automation projects long since finished, many companies may put new technology in the "nice to have" rather than the "must have" category. Ad spending could also drop.

Exits are harder to find
Drop in M&A activity: Tech mergers and acquisitions fell to 691 transactions with a total value of $37 billion in the third quarter, down from 822 deals and a value of $58 billion a year ago, according to the 451 Group. One reason for that is credit is getting hard to come by.

Danger to leveraged buyouts: One not-as-well understood side of the tech industry are the LBO companies that specialize in buying up troubled tech companies, fixing them, and either selling them or taking them public. But that takes a lot of upfront money, and with credit hard to come by, these company flippers will have to be even more selective.

Lack of IPO activity: The stock market has had little appetite for tech initial public offerings for more than seven years; now it's virtually disappeared. In the third quarter, there was only one venture-backed public offering. That's one more than the second quarter.

The bottom line
As the business gurus say, cash is king. Companies that have it and conserve it can survive and maybe even buy their competitors on the cheap. The CEOs of the companies that don't get to spend more time with their families.

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