IT that can bite you
Although growth rates have fallen since the heady 1990s, cash flows from big companies are attractive and many balance sheets are overcapitalised. In sectors such as software, profits are underpinned by recurring, high margin maintenance revenue streams.
Tech companies have become more attractive as buyout targets alongside a growing perception that volatility in the economy and business spending have become more muted. But investors should be careful about interpreting that as a sign that cycles have vanished.
Take the Blackstone consortium’s acquisition of semiconductor company Freescale. That was possible not because the chip cycle, with its periods of oversupply, has evaporated but because financing conditions are so incredibly forgiving. The buyers have flexibility from weak covenants and the ability to delay some interest payments on their debt if necessary to wait out a downturn.
The other big issue is the product cycle itself. That is alive and kicking. Just look at Apple’s renaissance on the back of the iPod, and Motorola’s fall from grace as the Razr handset has lost its shine. That is especially pronounced in consumer-facing tech companies. It becomes increasingly relevant as more companies focus on the man in the street.
But it also affects those targeting the less fashion-conscious business market. Only last year, AMD Advanced Micro Devices was riding high with a surge in market share because its microprocessors had the edge on Intel’s. It even got caught up in its own exuberance with the $5,4bn mainly cash deal for ATI. Now it is being hammered by an Intel product revival.
New investors looking to dive into the “changed” tech sector should remember that, beneath the surface, the nitty-gritty technology and products really need to be understood, lest they come back to bite you.
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