Tech Sector Braces for Wall Street Aftershocks

In a week that has cleaved once-mighty Wall Street institutions asunder, no market is safe from panic-induced losses, and that includes the technology sector.

The flight of investors from equities markets into low-yield U.S. Treasury bonds, gold and silver, and other fixed-income instruments has caused a steep decline in technology stocks.

The storm clouds began gathering over Wall Street earlier this month with the U.S. government bailout of Fannie Mae and Freddie Mac. On Tuesday night, the news broke that it had essentially taken over insurance giant American International Group, all of which swooned in the wake of the subprime mortgage crisis.

Also this week, once-stalwart Wall Street investment bank Lehman Brothers declared bankruptcy, while the iconic Merrill Lynch was forced to sell itself to banking behemoth Bank of America. Early Thursday, another blue-chip investment bank, Morgan Stanley, was rumored to be in merger talks with banking giant Wachovia, after shares of both firms were pummeled.

If Morgan Stanley should fall, that would leave Goldman Sachs as the lone independent investment bank on Wall Street. The carnage doesn’t end there. The country’s largest savings and loan institution, Seattle-based Washington Mutual, has put itself on the block after losing billions in the subprime mortgage market.

Some relief came on Thursday, with the Federal Reserve and other central banks agreeing to pump hundreds of billions of dollars into the global economy to bolster these flagging players. In late trading, the Dow surged by 3.86 percent, climbing back above the 11,000 mark. Though it was a huge rally, it still left the index down about 400 points from the beginning of the week.

The Panic Button

Earlier on Thursday, John Dryden, an equity analyst with Charter Equity Research, told the E-Commerce Times that most of the technology stocks he covers were trading at discounts.

“The stocks I cover are not trading on fundamentals, they’re trading on panic,” Dryden said. “People are selling them off in an effort to flee the capital markets. It’s fear on the part of the money managers who are going into gold, silver and treasury bonds. It’s capital preservation versus capital growth.”

The Wall Street crisis is likely to have the most immediate impact on technology companies that sell servers, computers and telecommunications systems to the financial services sector.

“The impact of job losses from Wall Street impacts enterprise IT spending,” Dryden said.

HP, Dell, IBM and Sun Microsystems all have exposure because they sell vast amounts of servers to banks, insurers and mortgage companies, he noted.

Also, semiconductor companies such as Intel and Advanced Micro Devices will suffer because their chips act as the brains of computers and server networks.

The Consumer Market

The Wall Street turmoil follows closely on the heels of slower consumer spending on IT products such as mobile phones, personal digital assistants, digital cameras, laptops, desktops, video game consoles and digital music devices.

“We already saw a weak back-to-school season, and we expect to see a weak holiday season,” Dryden said. “Phones, PCs, game consoles and PDAs will be light.”

Weak consumer spending could be exacerbated as the credit crisis expands and causes losses in consumers’ personal investment portfolios, he said.

However, at least one equity analyst thinks the mobile device market will weather the current financial storm.

“The nature of any purchase is obviously going to be affected by the overall economy,” Scott Pope of First Analysis told the E-Commerce Times. “But the [mobile device] replacement rates, we also believe, will be fairly robust.”

While there might be a very short-term slowdown in spending on new handsets by large companies, Pope doesn’t think such a slowdown will last very long.

“Even if there is a large number of layoffs at one of these Wall Street institutions, those employees will end up employed somewhere else or will buy their own phones, as opposed to having a company buy a BlackBerry for them,” Pope said. “I don’t think an unemployed investment banker would switch from a BlackBerry to a Motorola Razr.”

Liquidity Is a Concern

Technology companies in the midst of mergers and acquisitions could also face problems due to the turmoil on Wall Street.

“Liquidity is an issue, and folks are trying to deal with that,” Sid Parakh, an equity analyst at McAdams Wright Ragen, told the E-Commerce Times. “There are funds facing redemptions, and the credit markets, in general, are tighter. That could make it tougher to raise debt and equity by technology companies in the middle of an M&A deal.”

Like Charter Equity’s Dryden and First Analysis’ Pope, Parakh has seen his list of technology stocks trading well below the norm.

“There’s a lot of fear out there,” Parakh said, “and there’s no way to tell which companies will be affected most.”