Did Lehman Just Kill Tech?

The biggest financial story of the past 50 years just got bigger. Dell (Nasdaq: DELL  ) this morning said that it is seeing "further softening" in global demand in the current quarter.

Lehman Brothers' failure isn't directly to blame for Dell's woes, which management says it will address via layoffs, a restructuring, and investments in acquisitions and infrastructure. But the bank's failure has two major implications for tech's titans:

  1. Global access to capital is tightening, which means all but the most critical capital spending plans are likely to take a back seat for now.
  2. Less liquidity in the market will continue to be bad for an already-stalled IPO market, which means techies that depend on acquisitions for growth are likely to see fewer opportunities in the near term.

Call it a flesh wound rather than a death knell.

Pity the losers
Capital spending is where Cisco's (Nasdaq: CSCO  ) bread gets buttered. Sure, it has Linksys Wi-Fi routers and other small-time products that touch consumers but, on the whole, it's the big-ticket buyer that shops at Cisco, the CIO looking to upgrade his network. Less capital budget means fewer upgrades.

Juniper Networks and Intel (Nasdaq: INTC  ) face a similar problem, though Intel may not be hit as bad because of its consumer ties; fast-moving Apple is a large customer. Oracle (Nasdaq: ORCL  ) , meanwhile, relies on its shopping savvy to fund growth. Fewer IPOs won't help.

Microsoft could take a hit if the PC upgrade cycle slows as Dell expects. But even then it's likely to be minimal: Windows and Office are dominant franchises and will continue to fund massive cash flows for Mr. Softy.

But Microsoft is the exception; leverage is far more common. Firms take on debt to fund expansion and then rely on excess cash flow to pay down interest and obligations. The housing sector works this way. So do many European firms. When the cost of debt rises -- or when access to capital evaporates, a la the dot-com meltdown of 2001 -- capital spending slows.

Celebrate the winners
The good news? Winners can still be found in a slowdown because CIOs rarely halt spending completely. More often, they'll prioritize, investing in projects capable of producing very high returns or addressing a critical need.

Security falls into the "critical need" category. Infonetics Research said that worldwide spending on network security rose $1.4 billion, or 6%, in the second quarter. Gains should continue, which is good news for specialists such as VASCO Data Security. "Though the economy is still depressed overall, staggering increases in attack volume have forced companies to continue making new investments in security," wrote analyst Jeff Wilson in a research note.

IBM, meanwhile, looks strong because it's so diversified. Big Blue is also a strong player in global markets such as India and tends to sign very long-term services deals that guarantee revenue.

But when it comes to "very high return" opportunities, none are more interesting than cloud computing. Let's review the technology's advantages:

  1. Very low upfront implementation costs.
  2. Predictable annual subscription fees.
  3. Global connectivity and communal intelligence.

Cloud computing, put simply, is what you get when you place applications and computing resources on-demand, as accessible as power from the grid but hosted on the Web.

Who wins in this market? Many firms are playing, but I like VMWare (NYSE: VMW  ) , (NYSE: CRM  ) , and Google (Nasdaq: GOOG  ) best. I won't repeat the arguments you've already heard.

What I'll say instead is that we've arrived at an inflection point where CIOs are under pressure to produce more efficiency with fewer dollars. Buy to own infrastructure isn't as compelling in this sort of spending environment. Renting is more interesting, especially if the digital accommodations are Park Avenue chic.

To be fair, it'll be a while before and Google take Manhattan, as it were. But even Dell sees this shift coming; it recently reupped a deal to run its global sales and an increasing portion of its other operations on's technology.

Just in time, you might say.

Fool contributor Tim Beyers had positions in IBM's, Oracle's, and Google's shares and Google's 2010 LEAPs at the time of publication. He also hunts for the best of tech as a contributor to Motley Fool Rule Breakers, which counts VMWare and Google among its portfolio holdings. Here's how to try this market-beating service free for 30 days. Get access to all of Tim's Foolish writings here.

Apple and VASCO Data Security are Stock Advisor selections. Dell, Intel, and Microsoft are Inside Value picks. The Motley Fool's disclosure policy will never go bust.

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  • Report this Comment On September 16, 2008, at 1:53 PM, PressClub wrote:

    Did Lehman Just Kill Tech?

    No, I don't think this is the case. In my experience, it has been a very hard trying to raise funds for startup tech for some time now.

    I've been attempting it for over a year on an Internet company for its second round funding in a $100 billion dollar a year sector in the US alone, for which we have developed infrastructure, found mature experienced management, developed the site, got great search ranking and the site is on the premier online brand name for its sector (hint - an Internet giant bought a name very like ours a number of years ago along with a going company for nearly half a billion dollars).

    Round 2 was supposed to fund the marketing and sales effort to grow the company. Just try to find capital out there for startups. That money has not been flowing in quite a while. I sold quite a few valuable names to personally keep the company operating, but with the current economic news, unless there really are angels out there, we're done too.

    If one can't even find those willing to put up $50K-100K a month to support growth over two years for pretty much whatever equity position they want, from my view the economy is doing very badly. Despite what politicians say regarding support for small business risk takers, you better bring along your own safety net.

    Even those who are established names in the industry don't seem to want to spend right now and in some cases are being forced to cut their annual budgets to the tune of tens of millions of dollars.

    Sorry to whine, but times are more than a bit tough. In my view, the news about the big players going down at this point is simply a ripple effect caused by a variety of components, including a failure to put dollars into smaller projects that can create innovation and value.

    Of course, there is overseas money to be found for great domain names, but as an immigrant American, I kind of had this vision to grow a real company, produce jobs and keep things here in America first.

    As we collectively hurtle downward, I hope someone had the wisdom to bring a parachute and has the presence of mind to pull the ripcord soon.

    I hope that those who have the ability to turn the tap back on while there are still a few out there who care to risk everything to produce something of value will do so soon.

    Fear in these times seems our greatest enemy.

    Perhaps that is a foolish view, but then, I guess this, of all places, would be the place to express same.

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