In addition, the study revealed, there are lingering concerns about financial viability for a number of high-tech companies. According to the analysis, 44% of companies still face the risk of financial distress (the likelihood of default or bankruptcy within two years, if aggressive corrective actions are not undertaken), down only slightly from 49% in 2009. Moreover, that number represents a combined 56% of industry revenues that are at risk of financial distress.

Of particular note, more than 87% of consumer-electronics companies are at risk, up from 46.5% in 2009 due to thin profit margins as a result of weak demand from the lackluster economy and fierce competition globally. 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.

“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 Roberts. “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. This reality, combined with the continued sluggish economic outlook globally, will likely motivate aggressive consolidation.”

When looking at industry margins and the outlook for growth, AlixPartners sees clear geographic issues emerging that will likely have an impact on the strategies and performance of companies moving forward.

“EBITDA margins for companies based in Asia are averaging just over half what they are for companies based elsewhere,” said Roberts. “It appears that Asian companies are willing to accept lower margins in the hopes of achieving market-share growth, which could put North American and European companies, among others, at a distinct disadvantage. In fact, since half the companies we analyzed are based in Asia, this could mean lower margins for the industry as a whole in the future.”

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

The study also notes that Eastern European companies in 2010 made a 5% higher EBITDA margin than their Western European counterparts. This can mainly be attributed, says the study, to their ability to operate on lower cost bases.

The study also finds that weaker balance sheets and the potential for lower margins could make the industry quite favorable for private-equity buyers. “Private-equity firms specializing in smaller or distressed companies may find quite a few attractive turnaround situations and consolidation plays ahead,” said Roberts. “In addition, while many other industries are facing no-growth scenarios, high-tech could well represent a relatively low-risk investment opportunity for at least a portion of the huge amount of sidelined capital controlled by PE firms.”

The study looked at 1,195 companies in nine major high-tech industry sectors: telecommunications, semiconductors, Internet, EMS (electronics manufacturing services), computer hardware, consumer electronics, software, multi-sector technology and channel (distribution and retail). Public economic data and forecasts were also used.  

• Prev
• Next