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Tech firms won't be starved for investment

Posted: 20 Oct 2008     Print Version  Bookmark and Share

Keywords:investment  Technology companies  credit market  Investment funding 

The nightmare on Wall Street revolves around the idea that the entire global economy is being starved of investment because bankers were not willing to lend to each other or even companies.

The credit market has frozen solid and economic paralysis will soon follow. In response governments all over the world have approved or poured huge sums into the global banking system through either loan guarantees, or by purchasing substantial stakes in financial firms.

This unusual action, which amounts to nationalisation of the private sector by supposedly capitalist governments, is expected to help prod wary bankers into extending loans to businesses and consumers. Technology companies, it is hoped, will also benefit as the credit market eases and as consumers resume purchasing activities they had reportedly tightened in the last month.

Investment funding isn't the greatest danger technology companies face over the next one year. A slowdown in economic activities and falling demand from corporate IT buyers and consumers will top the list of concerns high-tech executives must deal with in the months ahead.

To understand the challenge they must deal with starting in the current quarter and extending well into next year, high-tech executives must look not at their bankers but at crude oil prices, which is a better barometer for future economic activities than the lending climate our political leaders and regulators fixate upon.

Last October 16, crude oil prices tumbled below Rs.3,010.74 ($70) per barrel, a 14-month low and down more than half from the record high of Rs.6,334.17 ($147.27) set only three months ago. The message is clear for those who haven't been sucked into the financial "crisis" and the ensuing panic that has engulfed Wall Street, driving down stock prices and creating the impression that Armageddon was imminent.

Investment funding is undoubtedly critical to business expansion, but the mere availability of capital cannot spur growth in the event of softening demand occasioned by other events, including a cyclical correction or a nasty shock to the global economy's nervous system.

That is exactly what has happened to the global economy, and it is being reflected in both energy prices and the equity market, which despite recent erratic swings, is self-correcting as investors gauge prospects for corporate sales and profitability over the next 12 months. Current equity prices, as investment experts have repeatedly pointed out, don't reflect today's sales and profit environment. Rather, they reflect future expectations.

Intel Corp., the world's No. 1 semiconductor company by revenue, offers a good example of what's happening in the global economy. With approximately two-thirds of its sales generated outside the United States, the microprocessor giant is a bellwether for economic expectations globally.

Intel beat analysts' consensus earnings forecast in the third quarter, and its revenue rose to a record high for the three-month period. "Our business model generates strong cash flows with third quarter operating cash flows of over $3 billion (Rs.12,903.18 crore)," said Paul Otellini, Intel's president and CEO while presenting the company's latest results to analysts. "With very little debt, our balance sheet is in excellent condition."

What worries Otellini and other industry executives is the quality of current market demand from corporate customers. "As we head into the fourth quarter, we see some mixed signs," Otellini said. "We expect the corporate segment to continue to show some softness. It is clear that the financial crisis is creating some issues that may impact our business. But the extent of that is difficult to quantify."

Otellini insisted Intel had taken steps to make its operation nimbler. The company has in two years reduced payroll by 20,000 and slashed costs by Rs.12,903.18 crore ($3 billion). With over Rs.51,612.73 crore ($12 billion) in cash and marketable securities, Intel does not need a government handout. And with one of the highest corporate credit ratings from Standard & Poor's, Intel will not be turned down by lenders.

Many tech companies are in similarly strong positions. Even the weak ones, including Intel rival Advanced Micro Devices Inc., have successfully raised huge sums recently in the toughest of investment environments.

Funding isn't going to trip up tech companies in the current credit meltdown. What could leave them reeling is being unprepared either for a softening market or the eventual economic upturn.

-Bolaji Ojo
EE Times





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