Brian.oco 0 Posting Whiz

With all the focus on the imminent Obama presidency, the actual health of the economy has taken a bit of a back seat. That changed somewhat after President-elect Obama’s high level economic summit on Friday. In a press conference after the meeting, Obama called the economic data “sobering” and warned that we are facing the “economic crisis of a lifetime.”
Increasingly, for the information technology sector, the grim economic news is finally taking its toll. Even the online software market, once thought to be recession-proof, is showing signs of collapse. The SaaS 20 Stock Index is down 40% for the year, pretty much no worse or better than the S & P 500. That tells us that even the online software market is weakening.

Says The Wall Street Journal last week, “This week, two online software companies issued weaker-than-expected guidance. Netsuite, which sells general ledger and other management software online, reported revenue for its third quarter in line with expectations, but issued guidance that was lower than analysts expected. Kenexa, which makes online human-resources software, said that revenue from the subscriptions it sells will be flat or slightly down next quarter. Online software companies tend to collect payments before they can recognize them as revenues, meaning that negative sequential growth can only be achieved if they lose customers.”

The biggest SAS provider of them all,, comes out with its quarterly revenue numbers this week. Company CEO Marc Benioff won’t talk numbers, but he did tell The Journal’s Business Technology Blog that Salesforce was “in a position of strength and said that the down economy was an opportunity to increase market share.”

Technology companies are notoriously highly-leveraged, with many IT firms loaded down with debt triggered by easy lending practices during the credit boom of the early 2000’s. Says Andrew Hinkelman, a Senior Managing Director in FTI's Corporate Finance practice in San Francisco. "There are some companies that are completely overleveraged and then there are those cases where the debt is coming due and the banks are not willing or able to refinance since the credit markets have dried up," Hinkelman said. "You are stuck at that point."

"Companies are going to be forced to use bankruptcy as a vehicle to right-size the balance sheet," he said.

Wall Street analysts predict that we’ll see a wave of IT bankruptcies well into 2009, specially in the software and semiconductor sectors, both of which carry higher debt loads than other IT verticals. Fueling the collapse of such companies is the tighter credit markets, which are effectively starving companies to death by refusing them credit. "These days the capital that is available to be invested, which is quite a bit, is at least temporarily sitting on the sidelines. Those people who need fresh capital to grow their businesses, irrespective of whether it's debt or equity, are going to have a hard time finding it," said Leo Crowley, an insolvency and restructuring lawyer at Pillsbury Winthrop Shaw Pittman LLP in New York.
Last week, PC vendor MPC Corp. went under. In addition, financial technology IT provider Solution Technology went bankrupt, as well.

It’s not a pretty picture and until the credit environment eases, expect more debt-heavy technology companies to spit the bit.