Technology Companies Bubble Up Again After the Dotcom Bust

This certainly sounds like good news for people like you and I, who work in the tech industry …

FTSE Techmark index of technology companies reaches highest point since 2001 as takeover fever increases

For years, technology was one of the least glamorous sectors of the stock market, but now it’s back in style. The Techmark index, which tracks the stock prices of 88 hi-tech British companies, is up 40% in two years, and at its highest point since 2001.

Investors are hopeful of a flurry of takeover deals as cash-rich foreign competitors seek to expand overseas. British companies such as Arm, Sage and Psion have strong balance sheets, operate in growing niche markets and have attractive research and development pipelines, making them an appealing target for overseas rivals.

Nor are valuations exorbitant. The Techmark, at 1941.51, is a long way from its high of 5743 at the start of 2000. Businesses have flourished in recent years as management has cut waste, sold unprofitable subsidiaries and improved sales and marketing. “The big shake-out after the internet bubble burst means only the strongest have survived,” says Roger Phillips at Evolution Securities.

He adds: “British technology companies make up quite a small part of GDP when you compare the contribution made to the US economy by their American counterparts. But they are throwing off cash and offer a safe haven to investors worried that the financial crisis has further to run.”

Shares in UK tech companies such as Misys and Aveva are trading at their highest levels in three years, while takeover speculation has increased since IT infrastructure provider Dimension Data received an approach from Japan’s Nippon Telegraph & Telephone.

But the sector is in a very different place from 10 years ago, when the market built up unrealistic growth expectations for many British hi-tech companies. For a while the optimism appeared to be well founded: the dotcom boom had its origins in the US, where a messianic belief in the ability of new technology to make firms more productive spawned a generation of analysts prepared to argue that the old rules of investment no longer applied.

But the cracks started to appear when companies began to rein in spending on large capital projects such as IT and telecoms. That was when the bubble popped and firms such as Marconi went to the wall.

With memories of turn-of-the-millennium excess fresh in their minds, technology companies were among the first to make cuts at the onset of the credit crunch in 2007; they were determined not to go into another recession with excess capacity. And, fortunately for them, businesses did not have huge IT budgets to cut, unlike in 2000/1. So when the downturn arrived, technology companies found themselves in reasonable shape.

Now, muscular British firms such as Sage, Arm and Autonomy are viewed as merger targets for foreign predators. Arm is the British microchip company behind the phenomenal success of Apple’s mobile devices. Recently, it launched a microprocessor design which it claims will lead to a new generation of “super smartphones”. Arm says the new chip will allow Apple and other handset makers to create phones with five times the “brainpower” of today’s models.

Autonomy, one of the UK’s largest software groups, has repeatedly been named as a likely takeover candidate, with IBM and Oracle seen as possible bidders. Mike Lynch, Autonomy’s chief executive, has brushed off the rumours, hinting instead that the company is more hunter than prey. Autonomy paid $775m (£500m) last year to buy Interwoven, which specialises in management software for legal documents, and raised £550m in a bond issue earlier this year. It has more than £600m available to spend on acquisitions; analysts suggest possible targets include Kofax, a document-capture software group listed on the London Stock Exchange.

The new bullishness in the sector has also prompted the private equity owners of Edwards to look at a possible flotation of the company whose vacuum technology is used by the world’s biggest chipmakers.

Crawley-based Edwards says its systems are in use at 10 of the world’s biggest semiconductor manufacturers, including AMD, Intel’s rival in the PC processor market. The owners value Edwards at more than £1.5bn.

In New York, Baker Capital has hired Morgan Stanley to explore a sale of Interxion, the Amsterdam-based data-centre operator. The potential sale comes alongside preparations for a flotation for Interxion in the US, which filed a draft registration with the securities and exchange commission in May.

Observers say the UK’s technology sector will always be dwarfed by the US’s, where Microsoft, Cisco, Apple and Google are among the industry giants. Mike Townend of IP Group, which invests in British technology start-ups, says: “American investors have always been more supportive of technology companies than their British counterparts, although attitudes are slowly changing on this side of the Atlantic.”

But it is too late: the Americans have had a headstart, and their companies are now so much larger than ours, it is unlikely we shall ever catch up. One broker says: “British technology companies that become big and successful are eventually taken over by even bigger and richer overseas competitors. It’s a cycle that will be difficult, if not impossible, to break.” © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds

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