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Falling stocks hamper tech cos' recovery

Posted: 26 Feb 2009     Print Version  Bookmark and Share

Keywords:economic recession  R&D  semiconductor companies  electronics companies 

The fear of a longer economic recession is growing on the equity markets, and panic-stricken investors are fleeing to safer investment U.S. treasury portfolios. Electronics companies that are heavily dependent upon the equity market, cash flow and other financial sources for their capital equipment, R&D and personnel retention programmes are likely to see their recovery efforts further held back by the inability to tap investors for operating funds.

Research firms have previously warned of the dire consequences of the tight financing environment but as stocks swoon and shares set new record lows, the equity market is also fast closing to manufacturing and other capital-intensive companies as an alternate source for business funding.

In recent months, few companies have endeavoured to call upon investors for additional funding or even use the facility of the bond market to raise cash. Cisco Systems Inc., for instance, raised Rs.19,887.68 crore ($4 billion) from bond investors earlier this month partly to retire debts and fund "general corporate purposes."

The company said the offerings would bear interests at an annual rate between 4.95 per cent and 5.916 per cent.

Other companies are not likely to be that fortunate. Those that wish to follow Cisco's path may have to pay a hefty premium to bond investors because many tech companies have had their ratings downloaded by ratings agencies due to concerns about the ailing economy.

With electronic stocks and especially shares in semiconductor companies trading at levels last seen five or more years ago, manufacturers seeking to beef up their dwindling cash resources via public offerings face the prospects of having their shareholding base severely diluted as they attempt to successfully raise enough funds from institutional investors.

More likely, however, these companies may not even get enough investors to participate in a public offering or bond sale due to valuation concerns, meaning any electronic manufacturer urgently in need of cash to fund operations in a low cash flow environment could sink further into difficulties.

Stocks haven't dropped this quickly and so far since the dizzying decrease experienced by the market during the 2000 to 2001 market downturn. On Monday, Feb. 23, all the major stock market indices fell sharply to their lowest levels since 1997.

The Dow Jones Industrial Average, the Standard & Poor's 500 and the Nasdaq Composite Index crashed 3 per cent or more each, adding to substantial declines that have piled up since the middle of 2008 and extending into the first weeks of 2009.

Semiconductor companies lost traction on the market along with other electronic manufacturers. The Philadelphia Semiconductor Index (SOX) on Monday tumbled more than 4 per cent to 189.11, down 56 per cent from the 52-week high of 429.45. Just before the semiconductor market crashed in 2000, the SOX traded as high as 1,362.10. It has now fallen 86 per cent from that peak.

The decline in the SOX is mirrored in the performance of the companies that make up the index. Leading semiconductor companies like Broadcom Corp., Intel Corp. and Texas Instruments Inc. are suffering but they are also holding on tightly to a large chunk of their market valuation while shares in rivals are getting wiped out.

The market values of the three chip makers have declined between 50 per cent and 55 per cent over the last year while the market capitalisation of many rival semiconductor companies, including Advanced Micro Devices Inc., Cypress Semiconductor Inc., Infineon Technologies AG and Nvidia Corp., have dropped by as much as 70 per cent to 90 per cent.


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