Johannesburg, 29 Jun 2004
While many with vested interests in the technology sector - from analysts and investors, to recipients of now hugely devalued share options, and even the media - bemoan the decline in the value of tech stocks since dot-bomb, there are those who believe the fall has brought some unexpected benefits.
One of these is Jan Hnizdo, Financial Director at JSE-listed Prism Holdings.
"The majority of technology companies that listed during the boom years and saw their share price soar either no longer exist or have been `relegated` to the status of `small cap` stocks. For those of us who have survived, there is some welcome relief from the intense pressure of constantly being in the spotlight and having to deliver what were (in hindsight) unsustainable earnings growth rates," he says.
Hnizdo calls this "flying below the radar" - a window of opportunity that he feels smart companies should use to get their houses in order and to ensure that business models result in sustainable earnings growth. "This opportunity allows companies to create their own expectations and work on strategies to achieve them," he explains.
With indications that the global ICT sector is starting to show signs of recovery, technology companies should not forget the lessons of the dot-bomb phenomenon. During that time many companies got caught up in their own hype. It was an era of "smoke and mirrors" with a single-minded focus on delivering earnings per share numbers at all costs, whether sustainable or not.
The sky-high P/Es afforded to companies meant that acquisitions became a necessity in order to meet the markets earnings expectations. To most companies this meant acquiring companies that were just about as large as the acquirer, resulting in huge management, integration and strategy issues.
In most instances, earnings were so single-mindedly focused upon that non-core acquisitions were unquestionably made and management teams further embarked on vast PR drives in attempts to explain away the synergies that would be derived at some point in time. The fall-out shows just how synergistic these acquisitions were: most were disastrous, many have proven fatal to the acquiring company as a result of over-gearing, loss of focus and over-extended management teams.
"The crash hurt many people, including investors and individuals employed within the industry. It has, however, offered those of us that have managed to survive an opportunity to `fly below the radar` of market speculation and attention - to get our houses in order, developing and implementing strategies that are sustainable," he says.
Hnizdo points out that Prism, for example, had already publicly acknowledged that management - caught up in the rush of market expectations for ever higher P/E ratios - had taken its eye off the ball and allowed itself to chase numbers by getting into industry sectors that were not its core focus.
"The Prism of today exists in a very different form to that of several years ago. Perversely it has emerged as a far stronger and more focused entity, notwithstanding the demise of the current share price. Management`s focus for now is on delivering sustainable earnings growth, the share price will follow suit at some point in time. Tech companies that have emerged post the dot-bomb era are those that have a market niche and that can deliver on customers` expectations."
Over the past two years certain business models and strategies have been implemented to ensure sustainable earnings and future growth. This has been done without the added pressures of unrealistic market expectations. Customers are now being focused on rather than spend on investor marketing. Internal IP focus and organic growth are the order of the day as opposed to "strategic synergistic" acquisitions.
"Our latest challenge has been in dealing with the exceptionally strong rand which has effectively caused our sales prices to drop by 25%, this kind of reduction would put some companies out of business. Over this period we have focused on ensuring that Prism remains profitable and cash generative at the current rand/dollar levels."
"We`ve have had to learn how to work smarter and focus on that 20% of the business that generates the 80% of our profits. This does not mean reducing our investment in R&D - because that would be equivalent to writing off our future.
"And flying below the radar means an opportunity to secure that future," Hnizdo concludes.