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More high-tech firms 'will merge to escape financial risk'

Revenues recover, but rising debt sparks bankruptcy fears

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Nearly half of high-tech firms are still at risk of financial distress after the recession, prompting the latest spate of mergers, acquisitions and downsizing, according to AlixPartners.

The business advisory firm said that 44 per cent of companies face the likelihood of default or bankruptcy in the next two years if they don't make some changes - down only slightly from 49 per cent in 2009. Weak demand and fierce competition is having a particularly bad effect on consumer electronics firms, with 87 per cent in the risk zone, up from 46.5 per cent in 2009.

“More than just about any other industry, much of high-tech faces a vicious cycle of the constant need to invest capital to drive product innovation and differentiation, and to keep up with the pace of new technology,” said Karl Roberts, managing director at AlixPartners and head of the firm’s High-Tech Practice.

“It takes a lot of capital to 'turn the technology crank' – especially in telecom, consumer electronics and computer hardware – and, as a result, even many strong performers are strapped with high debt loads."

The rationale behind recent deals like Google's bid to bag Motorola Mobility and AT&T's attempt to acquire T-Mobile US, along with downsizing like HP's potential sell-off of its PC division is likely to be due to the current climate and AlixPartners is expecting more activity like it in 2012.

"We expect continued, industry-rattling moves and changes, particularly from the strongest players," Roberts said.

Although profits are still good for most high-tech sectors, investment is falling because of the high debt load companies are already carrying, while consumer interest shows little sign of picking up. Roberts revealed:

Even in telecom, despite enormous strength overall, roughly three-quarters of players face distress risk, mostly due to the high debt loads they’ve taken on to expand their technological infrastructures and to fund acquisitions.

The study of 1,195 firms showed revenue growth of between 29 and 31 per cent in the semiconductor, software and telecommunications sectors in 2010, all recovering from a bad market in 2009. But even though they're growing their revenues, European firms are reducing their investment:

Companies in Europe have actually reduced their levels of investment (capital expenditures as a percentage of revenue) - from 10.2 per cent in 2006 to 9.4 per cent in 2010. This reality, combined with the continued sluggish economic outlook globally, will likely motivate continued aggressive consolidation in Europe.

AlixPartners also noted that the gap between winners and losers in the sectors was widening, with the margins for those on the top usually around 4.5 times higher those in the lowest quartile. ®

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