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Opinion: Tech firms will have enough investment

Posted: 20 Oct 2008 ?? ?Print Version ?Bookmark and Share

Keywords:investment? bank?

The nightmare du jour on Wall Street springs from the idea that the whole global economy is being starved of investment because bankers are not willing to lend each other or even among companies.

As we are told, the credit market has frozen solid and economic paralysis will soon follow. As a result, governments all over the world have approved or poured huge amounts into the global banking system through either loan guarantees or purchasing substantial stakes in financial companies.

This unusual event, which leads to the nationalization of the private sector by supposedly capitalist governments, is expected to ease prod wary bankers into providing loans to businesses and consumers. It is anticipated that the technology companies will also benefit from this as the credit market lightens the burden and as consumers resume buying activities they had reportedly tightened in the last month.

Investment funding isn't the greatest risk technology firms face the succeeding year. The staggering economic activities and falling demand from corporate IT buyers and consumers will top the list of concerns high-tech officials must deal with in the months ahead.

To understand the challenge they must look into the matter starting in the present quarter and extending well until next year, high-tech executives must observe not at their bankers but at crude oil prices, which is a better gauge for future economic activities than the lending scenario our political leaders and regulators focus on.

On Thursday (Oct. 16), crude oil prices fell below $70 per barrel, a 14-month low and decline more than half from the record high of $147.27 set only three months ago. The message is clear for those who haven't been sucked into the financial crisis and the ensuing panic that has engulfed Wall Street, driving down stock prices and creating the impression that Armageddon was imminent.

Importance of funding
Investment funding is undoubtedly critical to business expansion, but the mere availability of capital cannot spur growth in the event of softening demand occasioned by other events, including a cyclical correction or a nasty shock to the global economy's nervous system.

That is exactly what has occurred to the global economy, and it is being reflected in both energy prices and the equity market, which despite recent erratic swings, is self-correcting as investors measure prospects for corporate sales and profitability over the next 12 months. Current equity prices, as investment experts have repeatedly stressed, don't reflect today's sales and profit environment. Rather, they reflect future expectations.

Intel's performance
Intel Corp., the world's number 1 IC company by revenue, provides a good example of what's happening in the global economy. With around two-thirds of its sales achieved outside the U.S., the microprocessor giant is a bellwether for economic expectations globally.

Intel beat analysts' consensus earnings forecast in Q3, and its revenue rose to a record high for the three-month period. "Our business model generates strong cash flows with Q3 operating cash flows of over $3 billion," said Paul Otellini, president and CEO, Intel while presenting the company's latest results to analysts. "With very little debt, our balance sheet is in excellent condition," he noted.

Sliding market demand
What worries Otellini and other industry leaders is the quality of current market demand from corporate customers. "As we head into Q4, we see some mixed signs," Otellini said. "We expect the corporate market to continue to show some softness. It is clear that the financial crisis is creating some issues that may impact our business. But the extent of that is difficult to quantify," he added.

The executive insisted Intel had taken steps to make its operation nimbler. He said Intel has in two years reduced payroll by 20,000 and slashed costs by $3 billion. With over $12 billion in cash and marketable securities, he added, the company does not need a government handout. He noted with one of the highest corporate credit ratings from Standard & Poor's, Intel will not be turned down by lenders.

Many technology firms are in similarly strong positions. Even other companies, like Intel rival AMD, have successfully generated huge sums recently in the toughest of investment environments.

Funding isn't going to trip up tech companies in the current credit meltdown. What could leave them reeling is being unprepared either for a softening market or the eventual economic upturn.

- Bolaji Ojo
EE Times

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