Crisis? What crisis?

Will the credit storm soak the tech channel?

Analysis Unless you live in a bunker, you will have noticed the sub-prime credit crisis that has sucker-punched the US, pushing interest rates down, weakening the dollar and battering stocks and shares worldwide.

The impact is yet to hit home here in the UK but many are predicting doom and gloom for businesses as bank managers roll up their sleeves, pull back credit and clampdown on private equity funding.

But what does all this financial uncertainty mean for the UK tech channel and can distributors expect to feel the pinch long-term if the US market upheaval persists?

Surprisingly the answer seems to be that, in the short term at least, the channel reckons it can and will tough it out.

In June this year, equity analysts Standard and Poor's (S&P) said in its "LBO Activity Accelerating In The Global High-Tech Sector" report that credit trends in the IT sector had shifted to "fairly balanced but positive" in 2007 from a "negative" position in 2006. It said it expects to see that trend continue for the remainder of this year, but added that the debt burden for tech firms also looked set to grow.

However, more recently S&P has highlighted the growing uncertainty around the impact of the credit crunch on the financial market, as S&P analyst Bruce Hyman puts it: "The backlash to sub-prime is working its way upstream and no one is quite sure when it's going to hit."

He adds that the "doldrums of summer" may be contributing to a "short-term cusp" in the financial markets with the last two weeks of August being a typically slow time for businesses. But, Hyman explains, "it's a little hard to tell how much tighter the market can expect to be squeezed."

What's that coming over the hill?

Distributors and vendors are feeling some pressure from current market conditions, according to Ed Bateman, hard disk drive and components business unit manager at Bell Micro. Despite this, he reckons the exchange rate impact on the channel of a strong pound up against a painfully weak US dollar is "absolutely negligible and fairly limited."

He accepts that if the situation continues "there could be a huge reset in the market for both distributors and resellers trying to break even". But he argues that "these things tend to even out. It's not as if we haven't seen these fluctuations regularly."

Bateman says he is confident that the dip is only short-term, and that for Bell Micro, the return on components is reasonable. "Of course no one wants to see reduced margins and we're all about adding value to the business. We're in the value space."

Does Bateman think there could be long-term implications for UK distributors if market volatility continues?

"It could all be a different story if the dollar does fall through the floor. But it's all a big if at the moment."

Ovum IT services practice leader Angel Dobarbziev agrees that "at this stage the impact is negligible." He believes that what we are seeing is the market returning to normal conditions following an upturn in activity. The credit crunch derives from a huge injection of cash into mergers and acquisitions propped up by a flurry of private equity deals at the tail end of last year, he says.

Dobarbziev is convinced the financial risk has been sparse and he thinks resellers and disties will only see a brief low. But he warns that losses could be greater than financial results already publised would suggest, as pressure on profits grows and IT spending tightens.

He says there will be a broader impact on the UK economy which can expect a minor hit in terms of spending. But he points out that all this is off the back of "some pretty positive times and maybe this is simply the beginning of that slowdown".

Credit will become more expensive, suggests Dobarbziev, leading to a drop in consolidation within IT. As for the big players in the technology sector, enterprise-sized organisations have made considerable repairs since the 2001/02 dotcom crash and that this could save them if a recession does hit the UK, he says, adding "it is simply too early to tell".

He predicts that enterprise spending on IT services could drop as the cash cow dries up but reckons vendors have healthy balance sheets and need not be overly concerned, in turn minimising any impact on disties.

"The likelihood is that we will return to normal credit conditions and a more cautious attitude to risk following some exuberance in the market."

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