Wall St turmoil ripples through tech and data vendors
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Wed, 17 Sep 2008 12:08:26 GMT |
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By Daisuke Wakabayashi and Robert MacMillanLOS ANGELES/NEW YORK (Reuters) - Technology and information providers, already grappling with penny-pinching customers, were dealt another blow this week with the bankruptcy of Lehman Brothers and the takeover of Merrill Lynch .Losing two venerable Wall Street firms and big spenders for cutting-edge technology is troubling for the tech industry's biggest players, which have been coping with companies scaling back budgets for software and hardware upgrades this year.Research firm Financial Insights, owned by IDC, said information technology budgets for hardware, software and tech services shrank by 6 percent due to Lehman's collapse and Merrill's sale to Bank of America ."The number of potential customers continues to shrink, while institutions themselves become more complex," Financial Insights wrote in a report.The technology staples of Wall Street -- Cisco for networks, EMC Corp for data storage, IBM for services, Microsoft Corp for software -- are all likely to face some loss of business."Companies started cutting back information technology budgets a while ago so they are already pretty thin," said Forrester Research analyst Ellen Carney, who looks at the financial services market. "The writing has been on the wall."SPENDING TO CONTINUEBut while tech companies cannot escape the impact from the financial sector meltdown, analysts said they could benefit to a certain degree from work on integrating computer systems at banks like Bank of America.Also, for the vendors a merger can often lead to a struggle that sees one end up with a larger business while another risks being squeezed out altogether.For example, Bank of America uses SAP AG for its business software, while Salesforce.com has a contract with Merrill to provide a similar service to 25,000 of its employees.Salesforce declined to comment on how it will be affected by the Merrill buy-out and Lehman bankruptcy.The financial sector will continue to spend, according to analysts, although the focus may not be on buying new computer equipment but investments for projects to make systems work more efficiently and software to help decision making.Virtualization software, which allows a single computer to act like multiple machines, remains a hot area of spending because it helps companies save money and get the most out of existing equipment. Virtualization leader VMware Inc and Microsoft, which built virtualization technology into its new computer server software, are expected to benefit.Another area of heavy investment is expected to be business intelligence or analytics software, which helps executives make decisions. Major corporate software providers like SAP, Oracle Corp and Microsoft are trying to integrate those features into their business software."(Wall Street firms) still need to invest in the competitive tools to remain productive," said Sean O'Dowd, a senior analyst at Financial Insights.O'Dowd notes that commercial banks tend to spend more on basic technology than investment banks, who invest more in high-growth, advanced technology. Specifically, Bank of America has a reputation for building its own technology versus buying from outside vendors.MORE WARNINGSPC maker Dell Inc and computer products maker Ingram Micro Inc have warned about softening demand, and analysts expect more bleak outlooks from other tech companies.Cisco and IBM had warned last year about a slowdown in spending from the U.S. financial sector, before the June rescue of Bear Stearns by JPMorgan Chase & Co .Including Bear Stearns, the selling opportunity to the top 10 firms in the U.S. security industry has shrunk by a third, according to Financial Sights, based on estimates that Bank of America will reduce spending on technology due to overlap.News and financial data providers Thomson Reuters Corp and Bloomberg LP also could be hurt, analysts said.Merrill and Lehman are among Thomson Reuters Markets division's top 25 clients, which collectively account for about 13 percent of overall Thomson Reuters' revenue, a company spokeswoman said."Investors should not assume that revenue streams will disappear. For example, Bank of America clearly wants Merrill's strong franchises going forward," she said. "Lehman's assets will be sold off and some of that business will remain."UBS analyst Jeffrey Fan said Lehman accounted for about 1 percent of Thomson Reuters Markets' revenue, as did Merrill. Losing Lehman could lead to a 3 percent reduction in Thomson Reuters's 2009 earnings per share, he said."We have expected industry reshaping for some time; however the pace and intensity of the current restructuring is exceptional," Devin Wenig, chief executive of Thomson Reuters Markets division, wrote in a memo to employees. "I recognize that industry turmoil can be unsettling, but we are well equipped and ready to weather this storm."In response, the company is freezing some external job hiring and reducing travel and entertainment expenditures.Bloomberg LP is also likely to be counting the cost of the dramatic events of recent days, industry experts said."The fact is that Bloomberg over the last seven or eight years have been growing and installing their positions at a much faster rate than Reuters has," said Atradia Consulting Director David Anderson, who tracks worldwide market share for financial data providers. "Logic and math suggest that Bloomberg is going to take a bigger hit."The privately held company declined comment.(Additional reporting by Jim Finkle, editing by Tiffany Wu, Gary Hill)
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