Business Tech

There's an old joke about economists: Being an economist means you never have to say you're wrong; you've merely changed your outlook based upon further data.

That brings us to the current, very shaky state of affairs for the global economy and--since we're a site dedicated to coverage of technology--the high-tech industry. What worried economists six months ago has them in an outright panic now: one hyper-ventilating commentator on CNN opined on the day the U.S. House of Representatives defeated a Wall Street bailout package (or is that an "economic rescue" plan now?) that the economy was now on the brink of a depression.

A depression? That may be pushing it. But as Thursday's front page of The Wall Street Journal puts in very stark terms, bailout or not (the House of Representatives is expected to vote on a new version of the bailout bill Friday), signs are pointing toward a recession: auto sales are down; manufacturing activity is down; housing foreclosures are still high, while housing prices are down; and construction spending has tanked.

And if you believe this has little to do with the tech industry, think again. That mess on Wall Street means it's hard to get credit--whether you're a giant company looking to make capital expenditures like new server farms, or a start-up looking to buy office furniture or put money down for rent. Wall Street has always been a cutting-edge technology buyer, and that spigot is all but shut off for now. Universities and states are announcing plans to trim or freeze spending, and private customers probably aren't far behind. (Here's a breakdown of how foreclosures on subprime mortgages could lead to another tech bust.)

On top of that, venture capital spending is on shaky ground, mergers and acquisitions in tech are down, and successful initial public offerings on the stock market are as unlikely as they have been at any point since the dot-com bust. Also, anyone who believes hundreds of little companies completely dependent on advertising for their revenue can survive is kidding himself. We've seen that play before, and it doesn't end well.

Already, we're starting to see signs of growing problems. Rumors are spreading of growing layoffs in Silicon Valley, and since the third quarter just ended, it's a good bet that surprising earnings shortfalls could be the big news in the coming days.

Nonetheless, while many may fear a replay of the dot-com bust, what could happen to the tech industry over the next year will be different for a combination of reasons: This isn't a self-made disaster, there's not as much public money on the table, and the rate of spending for Web 2.0 companies has been relatively modest when compared to the wild gold rush days of the late 1990s.

Instead, the bust that could be in the wings is more likely to resemble the tech bust of the late 1980s, when a Wall Street and banking crisis, a recession (and yes, too many companies) conspired to cause rapid consolidation in the young PC and desktop software industries. In some ways, it was a longer, more painful episode for the tech industry. Tech spending and venture capital activity didn't dramatically rebound until Netscape Communications released its first browser and the dot-com boom was on.

So what's happening now? Truth is, no one really knows because the modern tech industry has never had to navigate through this sort of economic uncertainty. Jason Calacanis has made some dramatic predictions about start-ups disappearing. He could be right: But then the start-up executives at the Web 2.0 conference three weeks ago (just as the scope of the Wall Street meltdown was becoming clear) who fell back on that "cautiously optimistic" catchphrase could also be right.

We're going to do our best here at CNET News to keep you updated on the unfolding mess. (Or is it merely an untidy moment?) We'll let you know who's being acquired, who's going under, where the big layoffs are, and whether there's reason for optimism in the middle of all this bad news. Here's a roundup of this week's news.

Click here for ongoing coverage from CNET News, 'Tough times for tech'

The high-tech industry may experience a bubble every few years, but it doesn't exist in one. Bad news for the overall economy inevitably hurts the tech sector. Here's how it could happen this time:

The money mess
Mortgage foreclosures: The bursting of the housing bubble meant record mortgage defaults, which meant those notes were worthless to the financial outfits holding them.

Ruin on Wall Street: The ability of bright people to do dumb things never ceases to amaze, as several Wall Street stalwarts crumble under the weight of their bad debts, and banks such as Washington Mutual have to be rescued by the federal government.

The credit crunch: Banks don't trust each other any more than regular people trust the banks, so they won't loan each other money. When they do, it's at outrageous rates. That means the rates they charge to big companies that want to borrow in order to buy new tech gear or even start-ups that need to do things like pay their rent go even higher.

Slowing venture capital activity: In the second quarter, 56 tech transactions generated $4.7 billion, compared with 97 deals raising $8.8 billion a year ago, according to Dow Jones VentureSource. We're waiting on numbers for the third quarter, which just ended Tuesday.

Can tech spending be next? It's safe to assume tech spending in the financial industry will be more than low, but what about other industries? With big software automation projects long since finished, many companies may put new technology in the "nice to have" rather than the "must have" category. Ad spending could also drop.

Exits are harder to find
Drop in M&A activity: Tech mergers and acquisitions fell to 691 transactions with a total value of $37 billion in the third quarter, down from 822 deals and a value of $58 billion a year ago, according to the 451 Group. One reason for that is credit is getting hard to come by.

Danger to leveraged buyouts: One not-as-well understood side of the tech industry are the LBO companies that specialize in buying up troubled tech companies, fixing them, and either selling them or taking them public. But that takes a lot of upfront money, and with credit hard to come by, these company flippers will have to be even more selective.

Lack of IPO activity: The stock market has had little appetite for tech initial public offerings for more than seven years; now it's virtually disappeared. In the third quarter, there was only one venture-backed public offering. That's one more than the second quarter.

The bottom line
As the business gurus say, cash is king. Companies that have it and conserve it can survive and maybe even buy their competitors on the cheap. The CEOs of the companies that don't get to spend more time with their families.

Click here for ongoing coverage from CNET News, 'Tough times for tech'