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Post-Y2K investors wary By DAN MITCHELL Special to the Sun-Sentinel

April 2, 2001

One reason for the unprecedented length of the economic boom that appears to be ending was that increasing investments in technology resulted in increasing levels of worker productivity. Greater productivity, in turn, allowed for further growth with little inflation.

Even when the economy appeared to be in danger, as it did during the Asian crisis in 1998, productivity gains from technology investments pulled us back from the brink, many economists say.

But the situation appears different this time around. The information-technology sector itself has been hit hard, as many companies have markedly decreased capital spending on hardware and software. Even Federal Reserve Chairman Alan Greenspan cited the slowdown in capital spending on technology when the Fed lowered interest rates in February.

The immediate results can be seen as tech companies line up to announce layoffs and to report quarterly earnings that fall far short of expectations. In late March, business software giant Oracle Corp. announced it would trim its work force by 1 percent to 2 percent. Even as it announced it would meet Wall Street's earnings expectations for its third quarter, Oracle warned analysts to lower their expectations for the fourth quarter.

The situation is more dire for hardware companies, particularly for makers of semiconductors and telecommunications equipment.

Chip giant Intel Corp. announced March 8 that it would cut its work force by 6 percent, or about 5,000 jobs, and that it expected revenues to fall by around 25 percent in its first quarter. The next day, telecom gear-maker Cisco Systems Inc. said it would eliminate 3,000 to 5,000 full-time positions and 2,500 to 3,000 part-time and temporary jobs.

The cuts at Cisco, which makes routers and other equipment that run the Internet, were especially troubling because it is among the most successful technology companies, and one that actually thrived from the growth of the Internet. These are the first layoffs at Cisco in 17 years. In making the announcement, Chief Executive John Chambers warned that the slowdown in capital spending on technology "could extend beyond two quarters."

In January, Intel said the first quarter would fall short of expectations, but it surprised many observers by saying that it would nevertheless boost capital spending by about 12 percent, to $7.5 billion.

Many analysts predicted that Intel would drastically cut that increase. So far, it's sticking to that figure, even as it cancels some expansion plans. Citing abundant inventory, Intel said in March that it would delay the opening of a $2 billion plant in Ireland for a year. The plant will open in 2003 instead of 2002.

Software has been hit less hard than hardware, thanks in part to the fact that many companies are shifting spending from hardware to software to save money. But it's clear that the whole technology sector has been affected.

The question is, why now?

"We simply overinvested in technology over the past half-decade," says Edward Yardeni, chief investment strategist for Deutsche Banc Alex. Brown in New York. "During that time, spending on computers and communications equipment grew at 50 percent per year. That's really quite extraordinary."

So extraordinary that many companies overspent, creating too much technological capacity. Now, they're either abandoning investment plans altogether, or they're negotiating bargain-basement prices.

Part of the blame can be placed at the feet of venture capitalists and investment bankers, said Daniel Murphy, who co-manages the Frontegra Growth Fund for Northern Capital Management. "There was an enormous amount of capital that was poured into all these new companies that were coming out of the woodwork." In the wake of the investment orgy of the past few years, "now it's all dried up."

Just a few months ago, tech research firm Dataquest was making forecasts under the assumption of a soft landing for the U.S. economy, with a bit more pain for the tech sector because of inventory adjustments. But now, "the soft landing is not there," said Klaus Rinnen, Dataquest's chief analyst for semiconductor manufacturing. "It's a hard landing, but we believe the United States will avoid recession."

Still, Rinnen added, "nobody knows how bad `bad' is. Nobody can see the bottom."

The problem seems to go beyond the business cycle. In the last few years of the 1990s, businesses spent to prevent the Y2K computer bug from mucking up their systems. That spending, by some estimates about $50 billion combined in 1998 and 1999, seems to have done its job, but it also depleted the technology budgets of many companies.

At the same time, technology companies got used to corporate America's profligate spending on their products, often failing to remember that Y2K was a temporary phenomenon.

Of course, the dot-com shakeout also has had a big effect on the investment downturn. All those Internet companies, once awash in venture capital, spent big on computer equipment and software. As they fall by the dozen, expectations for investment spending fall with them.

With the dot-com threat largely abated, big companies can breathe a little easier--and think more carefully before making big investments in technology.

"It's all part of what I call the `hype cycle,'" said Rinnen. "Less competition from the dot-coms could reduce total capital spending."

On the other hand, he said, "it could just shift it to the companies that are left."

-- Martin Thompson (, April 02, 2001


If you are in a room full of **** (fecal
matter)up to your neck and a brick comes flying
towards your head and you duck, you can say
that the brick never hit you, but your soiled
face can be blamed on the BRICK ::::-

Following the same metaphor, **** happens,
but only once in a millennium.

-- spider (, April 02, 2001.

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