Silicon Valley Standing up to Recession

Ann All

As I blogged last month, tech companies appear to be weathering the recent economic downturn better than many of their corporate brethren.

 

The companies referenced in that post were located mostly on the East Coast. Not surprisingly, the trend holds true on the other side of the country and especially in Silicon Valley, the epicenter of the tech universe. MercuryNews.com cites several reasons for tech companies' relative financial strength: their ample cash reserves, their multi-national client bases, strong growth in emerging industries, and the dollar's weakness, which has boosted exports.

 

Yet the weak dollar has also increased the costs of operations in other countries, a relatively common characteristic for Silicon Valley companies. And it's not as if tech companies haven't experienced losses; they just haven't been as dramatic as those suffered by companies in other industries. Tech-heavy mutual funds slid 2.3 percent over the last 12 months, vs. a 20.3 percent drop in financial services funds, which have obviously been hit hard by the subprime mortgage crisis.

 

This year is looking less positive for tech companies, however, based on their performance in the first quarter, during which tech funds declined 12.9 percent. Thomson Financial recently sliced its projection for tech earnings growth for 2008 from 18 percent to 13 percent.

 

Cisco's stock closed at $23.38 on April 11, off 31.4 percent from its Nov. 7 peak of $34.08. Yet this doesn't appear to faze CEO John Chambers, who called the downturn "a chance to gain market share." Some of his optimism may be due to Cisco's $22.6 billion reserve of cash and short-term investments, up from $6.9 billion in 2005.


 

Cash-rich companies like Cisco and a slowdown in IPOs suggest we can expect to see a continuation of the consolidation that occurred across nearly every segment of the tech sector in 2007. Blue-chip companies like Microsoft and IBM are likely to be especially active acquirers.



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