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Thursday, October 2, 2008

10 ways the financial meltdown impacts tech

Can the problems impacting the financial sector impact technology companies? You bet they can!

We know there is a credit crunch and that the economy is slowing. This is translating into falling revenues and a drop in new orders. Tech company management is hunkering down. So are consumers. IT budgets are stagnant or falling and cost cutting will be the order of the day. Below we look at some specific ways that the tech sector will be reacting to this situation.

Surprisingly, there are some impacts that may turn out to be net positive for certain tech companies. As expected, though, there are also some seriously negative impacts.

Positive Impacts --

1. Increase in cloud computing - companies may look to avoid buying data center equipment and will instead look for a "pay-as-you-go" model. Beneficiaries Amazon (AMZN), Google (GOOG), eventually Microsoft (MSFT)

2. Increase in usage of open source products - generally cheaper to acquire and implement than the licensed products from vendors like Microsoft and Oracle, we may see an increase in the adoption rate of Linux operating systems, Apache web server software, Google Docs ... Beneficiaries could be Red Hat (RHT), Google or Citrix (CTXS) who now owns open source virtualization vendor XenSource

3. Industry Consolidation - those companies with money will acquire companies with good technology who are suffering due to this crisis. With financing difficult and expensive, those companies sitting on plenty of cash will be able to out-maneuver their competitors. Think of Oracle (ORCL) and Microsoft (MSFT) scooping up more software companies on the cheap. Intel (INTC) and IBM also have the heft to be players here.

4. Integration - Consolidation among tech companies and in the financial sector will increase the need for system integration services and software. This could benefit big consulting companies like Accenture (ACN) and the HP/EDS combination, for example. Also some of the software companies specializing in products that tie systems together like Informatica (INFA) and Pervasive Software (PVSW).

5. Cost cutting is in - look for more emphasis on virtualization in an effort to reduce data center costs. Beneficiaries are VMWare (VMW), Citrix (CTXS)

6. Investing - Angel investors and venture capital firms will have more opportunities to invest in up-and-coming young companies as these entrepreneurs are turned down for bank financing.

7. Software-as-a-service (SAAS) may become more attractive. With this model, the initial investment to get up and running on a particular software application tends to be much less than it would be if a company were purchasing and installing the full licensed application in their own data center. Look for (CRM) and Concur (CNQR) to maintain leadership positions through this downturn (if not high stock prices) and perhaps even NetSuite (N) will at least hold its own.

Negative Impacts --

8. Hardware spending delayed - Expect server sales to decrease as businesses put off spending on new equipment and focus on consolidating servers through virtualization. Who gets hurt: Sun (JAVA), HP (HPQ), Dell, maybe IBM. Big telecom suppliers are feeling the pressure in their sector: Nortel (NT), Alcatel-Lucent (ALU) reporting losses though Cisco (CSCO) seems relatively solid at this point. And with the consolidation mentioned above, it is quite possible redundant systems will be decommissioned, leaving surplus hardware and further reducing demand.

9. Consumers cut back - Worried consumers may decide they can do without the latest gadgets. This will hurt the semiconductor stocks as more than half of all semiconductors find their way into consumer electronics. The semiconductor equipment stocks, currently deep in the doldrums, will find their bear streak extended. High-flying gadget stocks like Apple (AAPL) and Blackberry producer Research in Motion (RIMM) may likewise see their growth curtailed. Who really needs a new TV? Makers of LCD panels for TVs are already seeing growth slow - think Corning (GLW).

10. The weak get weaker - Financing is something all companies need whether it is for growth, carrying inventory or making payroll. With lending tight, credit lines being reduced and banks reeling, tech companies won't be the only ones feeling the effects of this credit crunch. But for those tech companies teetering on the edge, this kind of environment could be enough to push them into bankruptcy or into the arms of a suitor. Think of AMD (AMD) and Micron Technology (MU), both reporting big losses, seeing their stocks crushed and facing an uncertain future. Where do they go from here?

In summary, today's environment will provide opportunities for some companies and serious challenges for others. As tech investors, the ten factors listed here should be kept in mind as we tip-toe through this bear market minefield.

Maybe you have another item to add to this list? Please leave a comment!

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