During the 1990s, the boom in high-technology spending spelled prosperity
for new and established companies alike. The popularity of
enterprise-resource-planning (ERP) and electronic customer relationship
management (e-CRM) systems, preparations for the millennium bug,"
personal-computer upgrades to take advantage of the Internet and expanding
corporate networks, demand for cell phones and personal digital assistants,
and the telecommunications companies' rush to build new networks--all of
these factors created about $1 trillion more in demand than trends would
have suggested in 1989.
Now this demand is gone, and we know there was less benefit from the
technology purchases than the new-economy prophets would have had us
believe. The overhang of capacity is significant. In software, for example,
the number of companies increased by 15 percent during the 1990s while the
market grew by 12 percent. For these companies to meet the projected
consensus earnings reported by Zacks Investment Research, average net
margins would have to increase by 94 percent, to a record 18 percent.
At the same time, software investment rose to 11 percent of worldwide
capital spending during the 1990s. Although software may gain a slightly
larger share over the coming years, the sheer scale of the industry will
probably limit growth in demand to a maximum of 8 percent to 12 percent.
Yet the companies formed are still with us. Some are substantial businesses
with good long-term prospects. They will invest through this downturn and
emerge as leaders; think of Intel riding out the perilous financial times
of the mid-1980s as the initial PC bubble burst. Many companies, though,
are investing for a future they cannot reach. They need to be
restructured--downsized, merged, acquired or liquidated.
Many companies, though, are investing for a future they cannot reach. They
need to be restructured--downsized, merged, acquired or liquidated.
But the restructuring hasn't happened. Managers and boards of high-tech
companies share an interest in maintaining their positions. Because
high-technology companies favor executives in the industry as board members
(for their expertise), these informal coalitions cross company boundaries.
The investment bankers and private-equity firms that might propose a
restructuring fear disrupting their relationships with this community and
reducing the odds of winning future business from it.
In fairness, these executives and directors are also cautious because of
the conventional wisdom that hostile deals do not work in high technology
and that most mergers have not been successful. This exaggerated belief is
grounded in a misreading of history. When the last extended downturn hit in
the 1980s, a much smaller high-tech industry was populated by a fraction of
the number of companies that compete in it today. More important, the
installed base of enterprise technology was smaller, so predictable revenue
streams for support and maintenance were neither as large nor as stable as
they are today.
Moreover, the potential benefits of consolidation are quite substantial.
Most enterprise-software companies, for example, spend 25 percent to 35
percent of their revenue on selling, general and administrative expenses.
If companies selling to the same customers were consolidated, the new
company could slash these outlays. Customers would benefit as well: The
plethora of vendors has left most IT organizations with confusing and
expensive choices.
Further, many companies are investing in research and development for
product lines that have a dimmer future than management would like to
believe. These outlays can run to an additional 15 percent or so of
revenue. Coolheaded managers can find savings here as well.
Last, a number of companies are trading at or below the value of the cash
on their balance sheets. There is economic value to harvest either by
finding tax-efficient ways to return that cash to investors or by merging
companies to channel it to businesses with a brighter future.
In the larger context, restructuring could spur the industry to do a better
job for customers. Customer spending will probably pick up when enterprises
become convinced that they can get top- and bottom-line benefits from their
technology investments. Companies need tailored solutions and help to make
their organizations, business practices and processes more productive. Many
small technology companies cannot accomplish this.
What will it take to open the gates to restructuring?
Most likely the industry will require outside intervention. Much as T.
Boone Pickens and Drexel Burnham Lambert shook up the energy and other
industries in the 1980s, people and companies outside the circle that
formed during the prosperity of the 1990s, may show the way.
FULL ARTICLE...
http://news.com.com/2009-1085-991490.html?tag=fd_nc_1