Surviving the tech bust

By Douglas Wood
CNN

(CNN) -- They may have survived and produced executives on the 2003 Global Influentials list, but even well-established companies like Xerox, Sony and Intel were hit hard after the sharp economic downturn that began in 2000.

SAP and Intel Corp. persevered because of their size and their dominant position in their fields. Sony Corp.'s PlayStation 2 dominates the game console market, but the rest of the firm's consumer electronics products have been battered by weak consumer demand and competition from lower-cost rivals like Dell Inc., Matsushita Electric Industrial Co. Ltd. and Toshiba Corp.

Xerox Corp. endured seven straight quarters of losses, loss of market share and an SEC investigation. Surprisingly, eBay Inc., the only pure Internet company on the list, not only survived the tech bust but also thrived.

There are also signs that tech spending may soon pick up again, which would be good news for these companies.

After peaking in March 2000, the technology-heavy Nasdaq market began a downward slide. Most tech companies saw their stock prices fall, and many new companies did not survive. Read on for a brief look at how selected industry leaders fared in the past three years.

Intel

Intel is the world's largest semiconductor maker. Its microprocessors power most of the world's PCs. The tech bust and weakened consumer demand led to a drop in annual net income, the amount of a company's earnings left after taxes, which went from $10.5 billion in 2000 to $3.11 billion in 2002. Intel also faced increased competition from rival AMD Inc. and its Athlon processor.

However, the company is continuing to spend millions in research and development, and has aggressively promoted its Centrino product line for laptops and Itanium processors for servers. It also closed down its online services and eliminated consumer electronics products to focus on its core chip businesses.

But the company continues to face competition from AMD, which is partnering with Sun Microsystems Inc. to sell servers and workstations using AMD's 64-bit Opteron processors. IBM also has adopted the Opteron processor for servers.

However, analyst Krishna Shankar of JMP Securities believes that Intel will outperform the market. In a research note dated November 14, 2003, Shankar said the company has sharpened its focus on chips for the high-growth "smart phones" market. But Shankar also wrote that Intel's PC and server-processor divisions are likely to remain the main sources of operating profits growth in the near term.

SAP

SAP is the world leader in enterprise resource planning (ERP) software, which integrates back-office tasks like distribution, accounting, human resources and manufacturing. The company has a customer base of about 20,000 clients worldwide and essentially wasn't affected by the tech slump, Gartner analyst Andy Eschinger said. The company's huge customer base provides it with steady revenues from recurring license and services revenue, and annual sales have risen each year since 2000.

But Eschinger noted that the ERP software market has been declining since 1998, the last year for double-digit growth. So the company has expanded into related fields, offering supply chain and customer relationship management software.

The company also should keep an eye on external threats from competitors like Microsoft Corp., which has moved into the ERP market for small- and mid-size businesses. In that market, SAP has better penetration in Europe than in the United States, Eschinger said.

Eschinger said Gartner is forecasting growth in the ERP software market in 2004-2005, a view shared by analysts at Merrill Lynch, who have a "buy" rating on SAP. In a research note dated October 9, 2003, Merrill Lynch analysts said the company is well-positioned to capitalize on a rebound in IT spending during the next two years.

eBay

eBay, the No. 1 online auction Web site, has thrived since 2000. Annual sales and profits have risen each year. Its stock price dropped with the market but has climbed back since, hovering around the $50 mark in November 2003.

Analysts at Deutsche Bank Securities recently maintained their "buy" rating on eBay, saying in a research note that the company's product listings increased by 45 percent in the fourth quarter compared with the same period last year. Merrill Lynch analysts also said the company has growth potential but that it was currently valued correctly.

eBay executives recently said the company expects to maintain its growth in the United States, and in European and Asia-Pacific markets. Executives said that they believe eBay's European operations alone could grow as large as its U.S. business.

Sony

Sony is the world's No. 1 consumer electronics company, and its popular PlayStation 2 dominates the worldwide home video game system market, with about 70 percent of global sales. Although it dominates the game console market, the rest of Sony's consumer electronics business (televisions, DVD recorders, computers, digital cameras, etc.) has suffered from weak consumer demand and increased pressure from lower-price competitors like Matsushita's Panasonic brand.

Annual sales and net income have dropped every year since 2000, and the company's announcement in April 2003 of lower-than-expected earnings sent the company's stock plunging. Sony announced a plan in October to reverse its fortunes, including laying off 20,000 employees and a joint venture with rival Samsung Electronics Co. Ltd. to make flat-screen monitors.

Gartner technology analyst Paul O'Donovan said the company needs to emulate the PlayStation's success in the rest of its consumer electronics business.

"To fight Panasonic, Samsung, Philips and the rest they need to bring leading edge products to the market at the right price as soon as possible," he said. "They need to go for volume sales rather than the early adopters or the Sony fanatics or the niche markets. They need to play the same game all the others are doing, and I think they need to do this to survive."

Xerox

Even before the tech bust, Xerox was in trouble. Its stock price was in free fall, going from $63.69 a share to $4.43, a 90 percent loss of market capitalization. The company had $17.1 billion in debt and $154 million in cash. The SEC was investigating its Mexico unit for accounting improprieties, and the probe eventually spread to other units.

The accounting scandal was resolved in April 2002, with Xerox paying a $10 million fine to settle SEC charges of improper financial reporting, and the company restated its results for 1997 through 2001. New CEO Anne Mulcahy also replaced the company's auditors and made changes in its finance department. Costs were also cut with a 30 percent reduction in the company's work force.

The company has reported operating profits for four straight quarters and has continued to invest in research and development. Debt also has been reduced. But the company still faces challenges from competitors in its targeted growth areas of production, office and business services, Gartner analyst Lynn Ritter said.

"In the services area, where Xerox was the pioneer with its XBS business, Xerox faces competition not only from other copier vendors with such offerings -- like Ikon, Oce, Pitney Bowes, etc. -- but also from printer vendors who are now entering the market for managed output services, like HP, Lexmark, IBM," Ritter said.