2008 the worst year for Silicon Valley 150 since 2001

A global recession hit Silicon Valley hard in the latter part of 2008, after months in which many thought big tech companies might be immune to a business slowdown. And experts say the aftershocks will be felt for years to come.
The numbers tell the story, as Hewlett-Packard CEO Mark Hurd has been known to say: The combined revenue for Silicon Valley's 150 biggest public companies grew 5 percent in 2008, the smallest annual increase since the Internet bubble burst in 2001. Profits fell 52 percent for the year — not as steeply as in 2001, but the worst decline since then.

Total market capitalization for the SV150, or the combined value that investors have assigned to those companies' shares, dropped 32 percent for the 12 months ending March 31, falling to $849.9 billion, the worst decline since 2002.

"When market capitalization goes down, it's a barometer of the business climate," says Kevin Walsh, a Santa Clara University business professor with years of experience as a tech executive and venture capitalist. "When companies' market cap is riding high, those companies tend to be more aggressive, more proactive in their outlook."

But in a downturn like this one, he added, "innovation gets squeezed, new projects get squeezed," as companies hunker down.

Already, the sharp decline in stock values has forced some companies, including Symantec and Sun Microsystems, to take significant write-downs on the goodwill value of past acquisitions. While the write-downs are not cash outlays, under accounting rules they still affect a company's bottom line.

Meanwhile, dozens of tech companies — from software-developer Adobe Systems to digital chip-maker Zoran — have been cutting jobs and other expenses in recent months.

The total size of the SV150 workforce actually grew 20 percent, as companies added more than 187,000 workers in 2008, but much of that was due to HP's acquisition of Texas-based Electronic Data Systems and its 140,000 employees. HP is already trimming thousands of those jobs.

While some companies are still hiring, many tech executives and industry experts say they don't expect an economic recovery before late 2009 or 2010, and employment won't pick up significantly before then.

"We're going to see companies cutting back on investments and projects, and that will lead to further reductions in head count as we go through the remainder of the year," Walsh said.

"I think some people were looking for a V-shaped bounceback," meaning a steep decline followed quickly by a sharp ascent, "and that's not going to happen."

But if some companies are cutting back on spending this year, the smarter ones are pursuing growth and innovation through new acquisitions, said Jon Fisher, a University of San Francisco business professor.

Smaller market capitalization means some companies with valuable assets, including new technology and talented workers, can be had for a lower price, noted Fisher, a former Oracle executive who's also been a serial entrepreneur.

He noted that his former boss, Oracle CEO Larry Ellison, has relentlessly increased revenue by acquiring a steady stream of start-ups and big companies too.

"I think you'll see a lot more M&A activity this year," added Fisher, who pointed to recent talks between IBM and Sun as the first of more to come.

Many Silicon Valley executives have noted that last year's downturn, unlike the Internet bust at the start of this decade, didn't start here. It's a broader recession, extending across many sectors and national boundaries, that is causing IT managers in other industries to delay orders for new enterprise software and computer systems, while consumers are slowing their spending on PCs and other gadgets.

But some recent tech trends may not have helped.

Many enterprise customers already had extra server capacity, and new virtualization products helped them squeeze more efficiency out of the hardware they already had, said tech analyst Rob Enderle, a veteran trend-watcher at the Enderle Group.

Meanwhile, he said, there were few "must-have" new products last year, although companies offered updated versions of popular lines. Apple's newest iPhone 3G was a hit, but AMD grappled with early bugs in its new Barcelona chip. Microsoft's new Windows Vista landed with a thud.

"The reality is we didn't have anything to really drive the market in 2008," Enderle said. "We need more things that eat capacity, that create the demand, to move more product."

But in looking ahead, Enderle cited two other trends that began to hit big last year and will continue to shape the industry: The move toward cloud computing is influencing new hardware designs, software innovations and business models like "software as a service." The consumer version of that trend can be seen in the growing popularity of smart phones and the downsized laptop computers known as netbooks, which are designed for Web-surfing and Web-based applications.

But some see the popularity of netbooks as a two-edged sword for the PC industry, since their lower price comes with a thinner profit margin.

Not to worry, Silicon Valley: Santa Clara's Walsh suggests the solution to that problem — or some other next big thing — may one day trace its roots to the recession of 2008.

While the big companies are pinching pennies, he said, laid-off workers are starting new businesses.

"That's the creative chemistry of Silicon Valley at work," Walsh added. "I expect a bunch of ideas are being developed in garages right now, and we may see them hit the ground in the next year."

How the silicon valley 150 fared last year
Combined data for the 150 biggest public companies in the valley:

Revenue: Up 5 percent, to $473.8 billion, the smallest increase since 2001.
Profits: Down 52 percent, to $22.7 billion, the worst decline since 2001.
Market capitalization: Down 32 percent to $849.9 billion, the worst decline since 2002.
Revenue and profit figures are for the four most recent quarters; market capitalization figure is for the 12 months ended March 31.

BY Brandon Bailey
Source:Mercury News

Contact Brandon Bailey at bbailey@mercurynews.com or (408) 920-5022.

Copyright © 2009 - San Jose Mercury News.



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