High-tech giants tumble
As the region's big players take a beating on
the market, the domino effect could paralyse
growth for a long time, writes James
Bagnall.
James Bagnall.
The Ottawa Citizen
The party's over. This is the
painful message in the
crushing, $34.7-billion
decline in share value suffered
by regionally based
technology firms since late
July.
While a rebound in share
prices is possible, the recent
collapse looks increasingly
like it has staying power and
may even deepen.
Already feeling the pain are
legions of high-tech workers
who, until now, have relied
on share options to round out
their annual pay packets.
Those stock options are now
virtually worthless.
Entrepreneurial employees
who had been thinking about using share options to finance potential
startups are also affected because they now find they have much less risk
capital than expected.
"It makes employees think twice about cashing in," says Debbie Weinstein,
a principal with LaBarge Weinstein, an Ottawa-based business law firm that
deals extensively with high-tech clients. "There are also a lot of high
net-worth individuals in this region who invest in next-generation startups --
and now they have less money to invest," she adds.
Most important, the mood in the industry has changed overnight from
irrepressible optimism to caution as the region's technology leaders
re-examine all their assumptions about the health of their business.
Few believe the high-tech industry is down for the count. The world's
telephone and data service firms are in the midst of a dramatic
transformation of their core networks, thanks to unparalleled growth in the
Internet and other types of data systems.
And this region's high-tech stars -- including Northern Telecom Ltd.,
Newbridge Networks Corp., Mitel Corp. and JDS Fitel Inc. -- are
supplying many of the pieces of those systems.
The trouble is, the giant telecommunications companies appear to be
ratcheting back their short-term spending plans.
Telecommunications providers in the Pacific Rim and Eastern Europe are
already trimming capital spending on new networks.
And James Kedersha, an analyst with SG Cowen, a New York-based
securities firm, says the 1999 capital spending budgets for the regional Bell
operating companies and long-distance service providers in the U.S. show
no increase over this year.
This represents a sharp change in projections since early summer -- and
helps explain why this region's telecommunications equipment suppliers have
been so hard-hit by the recent slide in stock prices.
Nortel, Mitel and JDS have all seen their share values plummet more than
40 per cent since July 20. Newbridge fell only 26 per cent, but most of its
decline occurred before the summer began.
Worse may be yet to come. "The third and fourth quarters are going to be
tough for a lot of companies in this field," says Mr. Kedersha. "A lot of
analysts' earnings estimates have yet to reflect this," he adds.
It's too early to tell whether weaker financial results will result in more
layoffs. Even before the current market turmoil, Nortel had announced plans
to trim several hundred positions locally and Newbridge had slowed the
pace of its hiring.
A major slowdown by the giants would have a tremendous ripple effect
because the big four employ about 20,000 full-time workers, representing
nearly half the region's high-tech workforce.
For the moment, most of the negative news is playing out in the stock
markets. There, the declines to date have been spectacular.
The combined market value of 29 regionally based technology firms was
$39.4 billion at the close of trading on Oct. 8 -- down from $74.1 billion on
July 20, when the technology-heavy Nasdaq composite index hit its all-time
high close of 2014.25.
This represents a collapse of 47 per cent, compared with a 30-per-cent
drop for Nasdaq and a 27-per-cent decline for the Toronto Stock
Exchange over the same period.
Take away the huge influence of industry giant Nortel and the results look
better. But they're still sobering. The share value of the other 28 regionally
based technology companies has plummeted $5 billion since July 20, or 33
per cent.
In short, this has been a brutal awakening for an industry that has rarely
experienced such across-the-board turmoil.
Indeed, only six of the 29 locally based companies currently trading on the
TSE or Nasdaq were public firms during the last economic recession in
1991.
For those running newly public companies, this bear market can be quite
unnerving.
Consider the case of Mariusz Rybak, the chief executive of Ottawa-based
Intelligent Detection Systems Inc. In late September, he learned that his
company had won a contract worth $9.4 million.
The deal, which promises to be solidly profitable, singlehandedly boosted
IDS' order backlog by more than 50 per cent. But when Mr. Rybak
formally revealed news of the deal after the markets closed on Sept. 29,
investors did nothing.
Despite the good news, IDS shares did not budge, closing at $2.15 on the
TSE the next day -- the same price as before the announcement.
Coincidentally, that was the same day Nortel warned analysts to expect
lower revenues in coming months, thus triggering a market-wide slide.
"The timing couldn't have been worse", said Mr. Rybak, "There has been
absolutely no positive reaction to (our contract win)," he added.
This sort of market behaviour can't help but hurt morale at many technology
firms, which are used to the idea of stock market gains as a reward for
higher company earnings.
"I'm telling our people not to look at the stock price," said Mr. Rybak, "It
just reflects the market, not how well the company is doing," he adds.
Local technology firms have adopted a variety of schemes for coping with
sagging share prices.
Earlier this week, Cognos Inc. -- the region's biggest independent software
company -- announced it would buy back up to five per cent of its
outstanding common shares. This tactic is supposed to signal to investors
that the firm believes its share price is undervalued.
The theory is this: Removing shares from circulation increases the relative
value of the remaining shares. However, general stock market trends often
have more influence over the share price. For example, the day after
Cognos announced the share buyback program, its share price fell 3.7 per
cent -- roughly in line with the drop in the Nasdaq composite index.
Four local technology companies have recently adopted shareholders' rights
plans that make it more difficult for outsiders to acquire them through an
unfriendly takeover bid. This group includes Mosaid Technologies Inc.; AIT
Advanced Information Technologies Corp.; JetForm Corp.; and DY 4
Systems Inc. (which has yet to receive shareholders' approval for the plan).
Reasons for implementing the plans vary. But in general the firms were
motivated by the fear that an earnings surprise, a declining Canadian dollar
or some other factor would reduce their share value relative to that of their
competitors. This would make them vulnerable to a potential takeover.
So far, no local firms have addressed the problem faced by employees
whose share options have been reduced to rubble by the most recent
market downtown. |
