Massacre and decimation in TMT sector, reports TIU

8 Jan 2003

Technology, Investment and Underwriting (TIU), the Irish-based financial and strategic corporate advisor to technology companies, is describing 2002 as having been dire for the Irish technology, media and telecommunications (TMT) industry.

“The year 2002 has seen once again the massacre, consolidation, decimation, ongoing and continuing uncertainty, as well as record endurance in the troubled Irish TMT industry,” TIU notes in its 2002 technology annual review.

TIU reports on a plethora of Irish TMT-related companies that are known to have failed or to have wound up during the continued uncertainty and shake-out of 2002.

Eight high profile failures reported last year were Qualtrace, DCP, Mirador, Tamoo, Braxtel, Antefacto, Xnet and Octagon. According to TIU, there are potentially another 40 TMT-related companies requiring re-financing. “Such companies only remain in business because backers commit to fund continuing ‘burn rates’, until such companies become cash positive,” TIU notes. Drastically reduced effective demand for TMT products/services during 2002 resulted in excess capacity, overproduction and losses, TIU reports.

According to the financial advisor, capital funding for technology companies ceased to grow in 2002. Venture capital funding has all but ceased except for strategic, high-growth global opportunities.

Figures released by TIU show that 2002 saw a drop in overall private company funding of 57pc. The total funding for 2002 was €185.44m. The leading firms that acquired top investments include Interexion (€20m from their current investors), Spectel (€15m from Investcorp SA) and AEP (€14.5m from B-Business Partners, ACT, Enterprise Ireland, AIB Equity and AEP). Most of the funding rounds last year were under €10m. TIU reports on a new era of caution, seeing decreased risk-taking and rigid investment criteria in the TMT industry.

Mergers and acquisitions (M&A) activity for 2002 started slowly but quickened pace by the end of the year, the technology review notes. High profile mergers include SmartForce’s merger with SkillSoft to take a 58pc share that made the resulting entity the biggest e-learning company in the world and Parthus and Ceva announced the proposed creation of ParthusCeva that was brought to life in the fourth quarter of 2002.

M&A activity is likely to continue growing into 2003 as the industry consolidates and players join forces to maintain competitiveness. “In the current economic climate, companies are finding it difficult to exist, let alone do well, hence the necessity to strengthen positions either by merging with stronger counterparts or by growth through acquisitions,” TIU reports.

For most TMT stocks, 2002 will go down in history as one of those years better forgotten. For much of the year, investors and analysts alike clung to the hope that the long-anticipated recovery following a difficult 2001 was imminent. “It soon became apparent that no rebound was likely anytime soon,” the technology review notes. TMT stocks experienced the worst third quarter in 50 years.

TIU predicts that for 2003, US and multinational technology investment, production and employment in Ireland are unlikely to grow. TIU also warned that skills-based technology multinationals will move towards lower cost areas of Europe, given their cost concerns, especially euro inflation, housing and employment taxes.

Most international research agencies, corporate finance houses and US investment banks are forecasting between 3.5pc and 5pc growth for an amorphous industry that has been used to double digit growth from the heady years of the last decade. And according to TIU, growth in 2003 will be sporadic and fragmented.

There is light at the end of the tunnel, however, as TIU reports on positive forecasts for 2003. New handset technology (eg Nokia), telemetry and location-based services (eg WS2) and software productivity tools (eg Wilde, SteelTrace) will succeed according to the advisors, as well as ‘lower costs’ enterprise applications (eg Navision) and web services as a means of integrating legacy technology. TIU believes that there will be a steady resumption of interest from venture capitalists in quality and early stage technology opportunities in 2003.

Similar views were also expressed by PricewaterhouseCoopers in its Global Private Equity report last September, which stated that although investment had fallen, funds available for venture capital and private equity investment have continued to grow. In addition, the Irish private equity and venture capital market is growing at over four times the global average, with investments growing by 64pc per annum since 1997.

By Lisa Deeney