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5 Reasons We're Not In A Tech Boom

From smaller VC funding to your paycheck, there are good reasons not to get carried away with today's pockets of tech success.

InformationWeek Staff

April 28, 2006

4 Min Read

3. M&A Activity Hasn't Gone Wild
The price tags on a few recent acquisitions--like eBay's $2.6 billion purchase of voice-over-IP provider Skype and News Corp.'s $580 million buy of MySpace--give the impression of a new tech bubble. And there's been a steady stream of acquisitions from big companies such as Google, Microsoft, and Oracle, as they try to stake out new market segments or claim emerging technologies.

Still, tech M&A activity isn't close to its 2000 peak. Meantime, the number of initial public offerings among IT companies is off nearly 20% from 2000. One reason is the market isn't craving tech IPOs. Another reason startups might not be going public is the cost of Sarbanes-Oxley compliance. Mark Ward, CEO of Copan, a VC-funded storage developer, estimates it would cost the company $4 million to $5 million just to comply with the SOX financial reporting and transparency regulations. Still, the company, which in March landed $56.5 million in new VC finding, is contemplating an IPO next year.

Chart: Not All Boats Rising -- Credit Suisse Disruptive Technology Portfolio (through April 26, 2006)

(click image for full chart)

Entrepreneurs cashed out of tech startups far more quickly in 2000 than they're doing today. In 2000, the median time from initial VC investment to an exit--acquisition or IPO--was two years and eight months. Last quarter, that had grown to five years, eight months, Dow Jones/VentureOne finds.

Antony Brydon, CEO and founder of Visible Path, a 4-year-old company that's trying to bring social networking to businesses, says the $25 million in funding it has from the likes of Kleiner Perkins Caufield & Byers is enough to maintain its independence. "Acquisitions are a luxury, rather than a requirement to survive," he says.

The fact that people made such a fuss about eBay's acquisition of Skype, a company with an estimated $60 million in sales last year, shows that valuations have come back to earth. Buying a company for 44 times revenue would have barely turned heads six years ago. "People now talk about selling companies at one, two, three times sales," says Steve Bengston, director of emerging companies services at PricewaterhouseCoopers. "In the bubble days, we talked about selling them for two, three, four times page views."

4. Stock Prices Are Sensible
It's no picnic if companies make it public, either, as Corel found out last week. The maker of the WordPerfect and CorelDraw software programs launched its IPO only to see the stock close below the offering price of $16 its first day.

Bellwether tech stocks are well below their all-time highs. Oracle is off 68% from its high in 2000, Microsoft is off 53% from its 1999 high, and IBM is off 37% from its mid-1999 peak. Yahoo, a dot-com darling, is off 72%. EBay is trading higher than it did during the boom, up 12% from its price in March 2000. Still, its shares are off 42% from their late 2004 high. Google, which began trading in August 2004, is 11% off its all-time high in January.

Even companies cast for today's tech environment can have their problems. Consider the Credit Suisse Disruptive Technology Portfolio, a basket of 30 public companies chosen because they have business models, technology, or both that stand to shake up or create a tech market. Those 30 stocks this year are up 6.7%, slightly outpacing the S&P 500's 4.6% gain. But 11 of those stocks are down for the year--four by double digits.

5. Tech Salaries Aren't Out Of Control
IT unemployment stands at 2.5%, and still no one's letting you bring your dog to work? Let's face it, the best things about the bubble were the big paychecks, raises, and signing bonuses--we don't miss the off-beat perks as much. There's no clearer sign that irrational exuberance remains absent than the line companies are holding on salaries.

Back in the boom days, compensation packages soared, and IT specialists job-hopped among Internet startups chasing quick millions. Today's 2.5% IT unemployment rate is about the same as in late 2000 and early 2001, but the compensation makeup is way different. In 2001, median base pay for IT staffers was up 9% from the prior year, according to InformationWeek Research's salary survey. Throw in bonuses, which represented 15% of staffer pay, and compensation was up 22%. This year--same low unemployment rate--median base salaries for IT staffers were up only 1%. Bonuses propped that up only 3% more.

Having the option to send work offshore, thanks to reliable Internet communication and a far more developed outsourcing industry in lower-cost countries, is one major difference. Perhaps the layoffs and disruption IT workers experienced after the bust made them averse to job hopping. Anecdotally, IT managers talk about how hard it is to find talent and even mention having to raise salaries. But there's no widespread trend.

So far, the numbers show that if a boom is indeed back, it's much more tight-fisted than the last one.

-- With Marianne Kolbasuk McGee

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