Tech CFOs Hoard Cash and Stand Pat

Technology companies shun innovation in favor of boosting their balance sheets.
David McCannFebruary 3, 2009

More technology companies are looking for a liquidity boost now than was true a year ago — but not because they want to make capital expenditures or ramp up new product lines.

Just over one-third (34 percent) of 100 tech-company CFOs said they expect to seek new capital this year, according to BDO Seidman’s annual Technology Outlook Survey. That was seven points higher than in last year’s survey. Most (56 percent) said private equity likely will be their chief source for new funds, way up from 33 percent in 2008.

For the most part, according to Seidman technology practice partner Bob Strasser, they simply want to make sure they have enough cash on hand to survive the year. “If you look at the earnings reports, they’re focusing on what their balance sheets look like,” he said.

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That means that innovation, historically a defining characteristic of technology companies, for once is a secondary concern. They will continue to invest research-and-development dollars into their existing core product lines where they can, but will be loath to take a chance on brand-new directions, said Strasser.

“Companies that have gotten away from their traditional core competencies are the ones that are incurring restructuring charges,” he said.

Still, 30 percent of participants in the survey, conducted in early January, predicted sales revenue will improve in 2009. While last year’s corresponding figure was 73 percent, Strasser found the degree of optimism about this year surprising. And to the extent sales are at least minimally acceptable, the technology sector should be in a good position. It has advantages over many others in that companies generally have low debt, strong equity or venture-capital financing, and, because of their young workforces, comparatively low employee health-care costs.

Meanwhile, a fascinating survey result came in the mergers-and-acquisitions area. In a vivid case of “it depends on who you talk to,” 43 percent of the technology CFOs said they believe M&A activity in the sector will pick up in 2009 — while 35 percent anticipate fewer deals. Only 22 percent predicted a flat year.

That is an uncommon response breakdown for a survey question that offers upper, lower, and middle responses, Strasser acknowledged. Responses may crowd at one end, or be evenly distributed, or bunch up in the middle, but rarely is there such diametric disagreement with few responses in the middle ground.

Strasser surmised that it has to do with the steep valuation declines many companies have suffered. “For some, it’s the same way homeowners look at the value of their houses — they can’t believe it’s only worth that much, and they decide they’re not going to sell at that price,” he said.

Paradoxically, it may be those CFOs whose companies are less interested in making a deal who think the M&A market will turn vibrant. They may assume that prices are low enough that there will be a lot of attractive targets, “but if you talk to companies that have actually been out looking for good deals, what they see is people wanting unrealistic prices.”