According to the Financial Times (FT):
“Almost half of companies in the global telecoms and technology industries face the risk of financial distress owing to more challenging markets and high levels of corporate debt, according to new research.
AlixPartners, the global business advisory firm, found that 44 per cent of companies in the sector were at risk of default or bankruptcy within two years. It pointed to particular distress in the hardware sector, and especially in the consumer electronics industry, where as many as nine out of 10 companies were at risk owing to thin profit margins as a result of weak demand and fierce competition globally.”
In the telecoms sector, about three-quarters of companies were deemed at risk due to high levels of debt taken on to expand technological infrastructures and to fund acquisitions.
AlixPartners said that this trend was underpinning the recent spate of M&A deals such as Hewlett-Packard’s $10.2bn proposed acquisition of Autonomy and its planned divestiture of its personal computer business, as well as Google’s $12.5bn proposed acquisition of Motorola.”
Comment: This is no surprise to us, as top line growth has not kept up with profit growth for a very long time. Cost cutting can go only so far in increasing the bottom line (earnings). And the competition is fierce, especially with all the consolidation in telecoms and price pressure from Chinese equipment vendors Huawei and ZTE. Huawei claims they are the #2 world wide vendor (closing fast on #1 Ericsson) in wireless infrastructure and #1 in optical network equipment (ahead of Ciena, which recently acquired bankrupt Nortel’s optical networking/ metro Ethernet business unit).
“More than just about any other industry, much of high tech faces a vicious cycle of the constant need to invest capital to drive product innovation and differentiation, and to keep up with the pace of new technology,” said Eric Benedict, managing director at AlixPartners. “In particular, the seismically disruptive effects of global adoption of high-speed mobile internet may well be the single biggest factor affecting not only high tech companies, but many other sectors over the coming 10 years.”