Wall Street Fall-out: Why the Financial Crisis is a Blow to Tech

Posted by: Spencer Ante on September 16, 2008

This Friday, as I sat in my office on the 43rd floor of 1221 6th Avenue, just around the corner from the fancy new headquarters of Lehman Brothers, I was hit by a combination of shock and sadness.

Lehman Brothers and Merrill Lynch survived the Great Depression and several world wars. But they could not survive the credit crunch of 2008. This is a historic, tragic and disturbing week that will reverberate for years.

The fall of Lehman and Merrill, and the likely end of insurance giant AIG, is horrible news for the U.S. and global economy, the financial services sector and the city of New York. But it’s also bad news for the technology industry, which until now has been relatively unscathed by the credit crunch. No more, I think. There will be short term and long term impacts.

In the short run, the market for technology just shrank. Wall Street has always been a big buyer and believer in the power of technology. Financial services firms account for a whopping 18 percent of overall IT spending, according to Forrester Research, with Wall Street firms making up a third of that. And now that three of the America’s top five investment banks no longer exist as independent entities, the demand for those products and services will be materially diminished. Check out this list of tech companies with the highest percent of revenue generated by financial services firms, which was published in November 2007 by American Banker and Financial Insights.

Information technology services firms such as Infosys, Wipro and Satyam Computer Services, and computer server makers such as Sun Microsystems will be particularly hard hit. According to Indian industry lobby group Nasscom, the banking, financial services, insurance, and telecom sectors account for at least 60% of Indian IT firms’ revenue.

Tata derived 60% of its revenue from financial services, while Cognizant gets 48% and Infosys gets 37%, according to the American Banker survey. This week, shares in Satyam have dipped 15% to $18, while Wipro’s stock has taken a 12% hit since last Thursday.

American tech service firms such as Unisys and payment processors Fiserv and Diebold—who all rely on Wall Street for a lot of their sales—are vulnerable as well. Since Monday, shares in Unisys have fallen 13%, while Diebold’s stock is down 12% since last Thursday’s close.

What’s more, the financial services industry is the largest purchaser of computer servers, accounting for 25% of worldwide server revenue, according to Gartner. Over the last two days, shares of Sun have dropped 12% to about $8.40. And today, shares in Dell, a big maker of servers, plummeted 10% as the company admitted that customers are cutting back on tech spending.

Last year, banks delayed or cut back on some projects but they did not slash spending. Now, bigger cuts in server spending are inevitable. Those cuts, of course, will have negative ripple effect on the software industry, which supplies programs that make those machines run.

In the long term, the credit crunch could have a more damaging impact on the state of innovation in the U.S. economy. Even before, Bear Stearns, Lehman and Merrill fell, venture capitalists and entrepreneurs griped that the U.S. was suffering from a capital markets crisis, with little to no public offerings for the last year. Now, the crisis just got more severe.

Consider the historically critical role that investment banks have played in the technology economy. Banks help raise money for new companies, they purchase stock during offerings and they raise awareness and investor interest in technology companies by covering them with research analysts.

Over the last 150 years, Lehman Brothers has played an especially important role and has been one of the most innovative banks on Wall Street. Under Chairman Robert Lehman in the 1950s and 1960s, it bankrolled or underwrote stock offerings for many businesses in new industries, including high technology companies.

In 1960, Lehman underwrote a stock offering for American Research & Development, the first venture capital firm to sell stock on the public market (and the subject of my book Creative Capital).

Then, in perhaps the most important story I tell in my book, I show how Lehman Brothers had the courage and foresight in 1966 to take public a little technology company, Digital Equipment Corporation. That IPO, I argue, showed for the first time that people could make a lot of money by investing in and nurturing the growth of a tech startup. It was the first home run of the venture capital industry, sparking the birth of America’s innovation-driven economy.

Since the 1960s, Lehman helped hundreds of other tech companies raise money. And its success has inspired other banks to follow suit.

Now, with three of Wall Street’s biggest banks either bankrupt or subsumed by a larger entity, there are three fewer outlets that can help tech companies grow and prosper. That means innovation and new business are going to take a hit.

The capital markets crisis in the U.S. tech industry just got a lot worse. And we probably haven’t seen the end of this horror show, based on the velocity of this weekend’s historic events. Fasten your seat belts, people.

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Reader Comments

TM

September 16, 2008 05:25 PM

I'm not very economy-savvy, but I don't see mortgages going away. Don't the remaining banks now divide up the same number of customers, and possibly need more servers and IT folks to support that change?

bb

September 16, 2008 10:26 PM

I agree with TM. I guess some people think every company is as poorly run as those facing bankrupcy.

koti

September 17, 2008 12:42 AM

May be US with it's open economy should be more cautious with two forces which are competing/cooperating to gain a influential role in US economy by gaining control over its financial sector. So that in the long run they can influence the US foreign policy. Firstly, China for the obvious reasons. Second and more discrete the middle east. Which is trying very hard with all the $9 trillion surplus cash to out do Jewish influence on its financial sector so that they can make US dance to their tunes.

Tom

September 17, 2008 12:53 AM

The financial industry would use soft dollars to make a lot of their tech purchases. Perhaps something like this is needed in other industries like health care to get them automated.


http://en.wikipedia.org/wiki/Soft_dollar

Ross

September 17, 2008 02:29 AM

I agree that you have a argument in the sense that now customers for each of remaining companies will increase and that in long-term the companies will require additional servers and IT technology. However I believe that now and in the imediate future technology and demand for that technology will suffer, until the general directon of the markets, market sentiment and conditions change 360 degrees. This we are taught in economics that companies will not invest in the future unless they believe thier return will be positive and above other safer returns available. Thus I conclude that Spencer Ante is correct in saying that the finacial crisis will effect the technology, for at least in short-term.

dave

September 17, 2008 10:35 PM

Were all DOOOMED!

DOOOOOOOOOOOOOOOOOOOOOOOOMED I tell you!
Close your eyes and cover your ears. Pretend its not happening and it will all just go away. Imagine you are in a fruit garden, with lots of trees and butterflies...

Tom

September 18, 2008 12:34 AM

I'm glad tech will be hit. The Bay Area has been on a virtual free ride for three decades, and, now reality is setting in. Things don't always go up. Not real estate, and not tech firms' stock.

SHEKAR

September 18, 2008 03:27 AM

There would be a significant impact on the technology industry, but, this is not the end. This is part of the cycle. The markets are resilient, though the corrections may be time-consuming and painful.

RA

September 18, 2008 09:28 AM

Well for one, the telecom industry hired the most IT professionals and that debacle occurred from '01 to '03 where nearly half the headcount in those sectors vaporized.

Since then, only the financial sector has had any significant hiring of IT professionals. The other MIS shops have been running on skeleton crews for much of the decade. Nonetheless, for NYC, IT is dead.

Plunge Protection Team

September 18, 2008 02:55 PM

Ralph, Ron, & Cynthia:

Now they're planning the crime of the century
Well what will it be?
Read all about their schemes & adventuring
It's well worth the fee

So roll up and see
How they rape the universe
How they've gone from bad to worse

Who are these men* of lust, greed, & glory?
Rip off the masks & let's see

But that's not right, oh no, what's the story?
There's you & there's me

That can't be right

Jim

September 18, 2008 05:01 PM

Don't be a hater, Tom.

Tripti

September 26, 2008 01:08 AM

I feel, that Stable model of banking systems that is coming up now, will be even more beneficial for tech firms.
New Regulations will come up and thus can become a good preposition for IT firms.
The only things Tech firms have to do is keeping eye on series of events that gonna take place in near future, and at the same time finding out the oopportunities in other financial segments like Basel II implementation, Consulting for enhancing opreataional efficiencies, Targeting niche segments like islamic banking and microfinance etc.

Jack

September 28, 2008 02:57 AM

What we know for sure is the crisis is based on technology. Electronic trading and electronically engineered markets in exponentially more abstract economic entities of no substantive value are entirely dependent upon computers and the internet. So they are contributors and benefactors from socially destructive activity, hardly worthy of any sympathy. Add surveillance, crime, vast energy use, pollution, wealth polarization, the loss of the letter and book, degrading of long term storage of the human memory, weakening of the brain by outsourcing, and the net gain is negligible if that.

Joseph

September 30, 2008 08:18 AM

This isn't the first or last time markets have taken a bath in their own greed. The markets are in turmoil because the banks wanted more profit and stock owners demanded wider margins. So banks adjusted the mortgage terms, lengthened amortizations and reduced the total income needed to qualify. We all know people who are house poor, they wanted bigger and better and were willing to stretch to get it, and the banks helped. The fact that mortgages have put a knife in the back of the banks is our fault (for stretching to have what we couldn't afford) and the banks fault (for not being content with 10% growth per quarter). What did the banks think would happen when a large company left the state (province) or even country, or when the interest rates pushed higher and people couldn’t afford the added interest on top of the stretched mortgage. This financial market will re-bound, the week (and stupid) will be gone and the strong will survive, technology projects will be postponed for a year, upgrades postponed for a year or two, but the world will not end, the markets will re-bound and technology will continue to innovate and challenge the best and brightest…

francis

October 3, 2008 04:03 PM

Some of the world’s biggest technology firms have felt the cold winds of change brought about by the global banking crisis. Big brand Apple, for example, saw its shares fall 20pc.Apple’s decline on the NASDAQ stock exchange reflected analyst fears that the company could be hurt if consumers cut back on spending if disposable income becomes impaired.This is the lowest point in Apple’s share history over the past 16 months. As the NASDAQ closed last night, Apple Inc closed at 105.26, 4.64pc above its 52-week low of US$100.59.Other big brands such as Research In Motion, creators of the BlackBerry, also suffered a double-digit decline of 27pc, ending last night at 11.18pc above its 52-week low of US$69.50.
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francis
Link Buliding

Muslem

October 20, 2008 05:57 AM

The US financial crisis is a driven punchement because of illegal actions of american army in iraq, afganistan and palastine and unlimitted support of israil. May allah collapse USA and drive amricans to the hell.

frontsoft

December 4, 2008 03:35 AM

I think the US will recover from the current situation, but takes some time
---------- ecommerce solutions

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About

BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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