Wall Street Fall-out: Why the Financial Crisis is a Blow to Tech

This Friday, as I sat in my office on the 43rd floor of 1221 6th Avenue, just around the corner from the fancy new headquarters of Lehman Brothers, I was hit by a combination of shock and sadness.

Lehman Brothers and Merrill Lynch survived the Great Depression and several world wars. But they could not survive the credit crunch of 2008. This is a historic, tragic and disturbing week that will reverberate for years.

The fall of Lehman and Merrill, and the likely end of insurance giant AIG, is horrible news for the U.S. and global economy, the financial services sector and the city of New York. But it’s also bad news for the technology industry, which until now has been relatively unscathed by the credit crunch. No more, I think. There will be short term and long term impacts.

In the short run, the market for technology just shrank. Wall Street has always been a big buyer and believer in the power of technology. Financial services firms account for a whopping 18 percent of overall IT spending, according to Forrester Research, with Wall Street firms making up a third of that. And now that three of the America’s top five investment banks no longer exist as independent entities, the demand for those products and services will be materially diminished. Check out this list of tech companies with the highest percent of revenue generated by financial services firms, which was published in November 2007 by American Banker and Financial Insights.

Information technology services firms such as Infosys, Wipro and Satyam Computer Services, and computer server makers such as Sun Microsystems will be particularly hard hit. According to Indian industry lobby group Nasscom, the banking, financial services, insurance, and telecom sectors account for at least 60% of Indian IT firms’ revenue.

Tata derived 60% of its revenue from financial services, while Cognizant gets 48% and Infosys gets 37%, according to the American Banker survey. This week, shares in Satyam have dipped 15% to $18, while Wipro’s stock has taken a 12% hit since last Thursday.

American tech service firms such as Unisys and payment processors Fiserv and Diebold—who all rely on Wall Street for a lot of their sales—are vulnerable as well. Since Monday, shares in Unisys have fallen 13%, while Diebold’s stock is down 12% since last Thursday’s close.

What’s more, the financial services industry is the largest purchaser of computer servers, accounting for 25% of worldwide server revenue, according to Gartner. Over the last two days, shares of Sun have dropped 12% to about $8.40. And today, shares in Dell, a big maker of servers, plummeted 10% as the company admitted that customers are cutting back on tech spending.

Last year, banks delayed or cut back on some projects but they did not slash spending. Now, bigger cuts in server spending are inevitable. Those cuts, of course, will have negative ripple effect on the software industry, which supplies programs that make those machines run.

In the long term, the credit crunch could have a more damaging impact on the state of innovation in the U.S. economy. Even before, Bear Stearns, Lehman and Merrill fell, venture capitalists and entrepreneurs griped that the U.S. was suffering from a capital markets crisis, with little to no public offerings for the last year. Now, the crisis just got more severe.

Consider the historically critical role that investment banks have played in the technology economy. Banks help raise money for new companies, they purchase stock during offerings and they raise awareness and investor interest in technology companies by covering them with research analysts.

Over the last 150 years, Lehman Brothers has played an especially important role and has been one of the most innovative banks on Wall Street. Under Chairman Robert Lehman in the 1950s and 1960s, it bankrolled or underwrote stock offerings for many businesses in new industries, including high technology companies.

In 1960, Lehman underwrote a stock offering for American Research & Development, the first venture capital firm to sell stock on the public market (and the subject of my book Creative Capital).

Then, in perhaps the most important story I tell in my book, I show how Lehman Brothers had the courage and foresight in 1966 to take public a little technology company, Digital Equipment Corporation. That IPO, I argue, showed for the first time that people could make a lot of money by investing in and nurturing the growth of a tech startup. It was the first home run of the venture capital industry, sparking the birth of America’s innovation-driven economy.

Since the 1960s, Lehman helped hundreds of other tech companies raise money. And its success has inspired other banks to follow suit.

Now, with three of Wall Street’s biggest banks either bankrupt or subsumed by a larger entity, there are three fewer outlets that can help tech companies grow and prosper. That means innovation and new business are going to take a hit.

The capital markets crisis in the U.S. tech industry just got a lot worse. And we probably haven’t seen the end of this horror show, based on the velocity of this weekend’s historic events. Fasten your seat belts, people.

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