Tech sector's turn may take a while

Jobs expected to trail pickup in economy

Technology

January 12, 2003|By Stacey Hirsh | Stacey Hirsh,SUN STAFF

First, spending began to drop. Then came the layoffs. And don't forget the disappointing earnings and falling stock prices. So when will it all end for the tech sector?

Not until at least midyear, according to most experts.

"My guess is it'll eventually rebound, but I think it'll be a while," said Zeus Kerravala, a vice president at the Yankee Group in Boston.

Kerravala said technology spending overall will be flat this year.

Last year, the tech sector was still coming down from the high of the dot-com bubble - which left behind excess inventory, overbuilt telecommunications networks and less demand for technology products when it burst. Maryland technology companies, touted as a key to the state's economic future, struggled, watched their shares plummet and were forced to put the scalpel to themselves.

Aether Systems Inc., the Owings Mills wireless technology company, cut its work force to about 520, less than half its peak of two years ago. Ciena Corp. laid off 450 workers in September - the reduction the most recent in a series of cuts that brought the Linthicum fiber-optic equipment maker's work force to about 2,100 from 3,778 a year earlier.

Tech jobs aren't expected to return this year until after the rest of the economy bounces back.

"The first jobs are going to come back in the more general economy and we're ... certainly seeing the unemployment rate rise. That's got to stabilize, and then we'll see technology follow it," said Gregory E. Gieber, who covers technology stocks for A.G. Edwards & Sons Inc. in St. Louis.

James Glen, an economist who covers high-tech at Economy.com, said: "As demand for tech products improves, I think we're going to see a stabilization in employment, but I don't think we're going to see a huge turnaround in [tech] employment until well after the recovery."

Economy.com predicts that economic growth will pick up steam around the middle of this year and then into next year.

Large mergers and acquisitions won't likely begin until the middle of the year, either.

While there were a great number of deals last year, they were mostly small ones, said Tim Miller, president of Webmergers.com, a San Francisco company that researches Internet businesses. The size of the deals won't grow until stock prices rebound, which isn't expected to happen until the second half, Miller said.

"There's nothing that drives deals like having a high-priced stock currency that you use to buy other companies," he said. "That drives deals, and we don't have that now."

Indeed, several Maryland companies saw shrinking stock prices last year.

The Laurel-based Internet firm Digex Inc., for instance, watched its shares fall from an all-time high of $152.46 in March 2000 to below $1 before announcing last month that Nasdaq planned to delist its stock from the Nasdaq SmallCap Market. And shares of Corvis Corp., the Columbia maker of fiber-optic equipment, fell from a $108.06 high in August 2000 to below $1 last year. The company's shares moved from trading on the Nasdaq National Market to the Nasdaq SmallCap Market in October.

Decisions about buying companies will be much more measured, and there will be less competitive pressure to acquire other businesses, said Kerravala of the Yankee Group.

"Mergers and acquisitions will be tough," Kerravala agreed. "Really, the only companies that are in the position to acquire companies are IBM, Cisco, folks like that."

There are, however, some exceptions.

Tom Peltier, who heads the information technology services investment banking group at Legg Mason in Baltimore, said the government side of information technology spending is robust because of the war on terrorism and homeland security purchases. "As a result, those companies who focus on that segment of the market have been doing very well, and we've been very busy both on public offerings and on the [merger and acquisition] side with those companies," Peltier said.

Experts believe that the government - along with security - areas of technology will continue to be strong this year.

BreakAway Ltd., which makes entertainment video games as well as military simulations, is expecting 2003 to be a good year. The 5-year-old Hunt Valley company sees government as such amajor growth area that it has built an entire division around those projects. "I don't remember it ever seeming more positive," Douglas A. Whatley, the company's founder and chief executive officer, said of the outlook for this year.

Given the terrorist threats, the government will likely drive product development, and products will move quickly from government to commercial applications, said Newt Fowler, head of the technology transactions group at the Baltimore-based law firm Venable, Baetjer and Howard.

Fowler, who is also chairman of the Greater Baltimore Technology Council, says Baltimore is in a good spot to take advantage of any success the security area of technology may see.

SafeNet Inc., for instance, saw both revenue and earnings grow last year. The publicly held Internet security firm in White Marsh reported earnings of 12 cents per share on revenue of $8.8 million for the third quarter of 2002, compared with a net loss of 2 cents per share on earnings of $7.4 million posted for the second quarter of last year.

"The greater Baltimore region is incredibly well-positioned to take advantage of this focus on security, given our proximity to NSA, the federal labs and to Washington," Fowler said.

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