Five tech companies that could use a bailout

Now that the government has pledged US$700 billion to bail out the financial banking industry and is considering lending $25 billion to help the auto industry avoid bankruptcy, many tech companies may be wondering where to get their hands on government bailout cash. While tech companies may not have the same level of clout among Washington policy makers as AIG or General Motors, some of the industry’s biggest players have been hit hard times in recent months and could certainly use a health infusion of cash to help them right their ships. Here’s our take on the five biggest tech companies that are most in need of a helping government bail out.

Bailout Candidate #1: Yahoo

The numbers: Yahoo (NASDAQ: YHOO) recently said that it would lay off “at least” 10 per cent of its global workforce before year-end; third-quarter 2008 revenue only increased one per cent over third-quarter 2007 revenue; third-quarter 2008 net income of US$54 million was just over one-third the size of its third-quarter 2007 net income of US$151 million; share price has declined by more than 60 per cent over the past year, currently stands at around US$10.75 per share.

What’s gone wrong: Look back to the heady days of last February, when Yahoo was confidently rejecting Microsoft’s bid to purchase the company for US$44.6 billion. Apparently, Yahoo was pushing for Microsoft to increase its offer to US$56 billion, which would have translated to a value of about US$40 per share. What a difference nine months makes: Yahoo’s share price is now hovering in the US$10 range and its proposed arrangement to share advertising revenues with search rival Google was scuttled on fears that the U.S. Department of Justice would block the deal from going through.

The turnaround strategy: At the moment, Yahoo is clearly rethinking its decision to reject Microsoft’s bid from earlier in the year. Yahoo CEO Jerry Yang recently acknowledged at a Web 2.0 conference that “the best thing for Microsoft to do is buy Yahoo” and that he would be willing to sell the company “at the right price whatever that price is.” Unfortunately for Yahoo, Microsoft CEO Steve Ballmer recently indicated that his company has “moved on” and that no deal was currently in the works.

Bailout candidate #2: Sun Microsystems

The numbers: Sun (NASDAQ: JAVA) announced plans last week to cut 18 per cent of its global workforce, or as many as 6,000 of its employees. In its most recent earnings report, the company posted a US$1.7 billion loss in the first quarter of 2009, down from its net income of US$89 million in the first quarter of 2007; its share price has declined by more than 80 per cent over the past year and currently stands at around US$16.50 per share.

What’s gone wrong: Sun insists that its troubles are primarily the fault of poor economic conditions and are not the result of losing business to competitors such as IBM. Specifically, Sun says that the collapse of major Wall Street firms over the past three months have wiped out some of its biggest customers. However, the company has missed analyst expectations for three consecutive quarters and some analysts have pointed to the company’s struggles with its servers and server virtualization segments as particular trouble spots.

The turnaround strategy: Sun’s recent round of layoffs are a part of its broader reorganization plan, which includes creating an Application Platform Software division that will focus on technology such as its MySQL database and its GlassFish application server. The company has also been rumored to be a major candidate to be bought out, with Fujitsu and HP said to be the most interested parties.

Bailout candidate #3: Motorola

The numbers: Motorola (NYSE: MOT) posted a US$397 million loss in the third quarter of 2008, with the biggest losses coming from a mobile-devices segment that reported an operating loss of US$840 million for the that quarter, more than three times the US$248 million loss it reported in the third quarter of 2007. The company has also announced plans to cut another 3,000 jobs, with the vast majority coming from its cell phone segment; its share price has declined by more than 75 per cent over the past year and currently stands at under US$4 per share.

What’s gone wrong: In the two-plus years since Motorola scored a major success with its Razr series — which until recently was still the best-selling handset model in the United States — the company has been left behind by high-profile 3G devices such as Apple’s iPhone, Samsung’s Instinct, Research in Motion’s BlackBerry Storm and HTC’s G1. The company, which trails Nokia and Samsung for the largest market share of the global handset market, has even been rumored to be willing to spin off its handset division, despite forming the largest segment of its total wireless business.

The turnaround strategy: Starting next year, Motorola will be concentrating on producing handset models that run on either Windows Mobile or Google Android. Motorola co-CEO and handset division chief Sanjay Jha said recently that concentrating on two mobile operating systems will cut production costs and improve the customer experience. Previously, Motorola had offered devices based on several platforms including its own Motorola OS, Windows Mobile, Symbian and the Linux-based MOTOMAGX.

Bailout candidate #4: Nortel Networks

The numbers: Nortel Networks (NYSE: NT) lost an astonishing US$3.41 billion during the third quarter of 2008, which was way down from the US$27 million net income that it generated in the third quarter of 2007. The company also expects to lay off 1,300 employees; its share price on the New York Stock Exchange has declined by more than 95 per cent over the past year and currently stands at less than US$1 per share.

What’s gone wrong: A lot of things. Nortel is primarily being hurt by the current economic recession and by declining demand for its equipment from telecom service providers. Additionally, some have speculated that some of Nortel’s major 3G build-outs have stalled due to frozen credit markets. Since Nortel is a Canadian company, it will have to get that government to pony up.

The turnaround strategy: Nortel’s first order of business seems to be selling off its Metro Ethernet unit, which the company has said is being crowded out of its market by tough competition. If the company is successful in its bid to sell off its Metro Ethernet assets, it will have more money freed up to its carrier and enterprise networks units. Nortel plans on undergoing a major restructuring early next year by giving each of its units more control and autonomy, which the company says will create more accountability for each unit. The company is also looking to invest more in applications services and in adopting a more software-driven business model.

Bailout candidate #5: Sprint

The numbers: Sprint (S) posted a net loss of US$326 million for the third quarter of 2008 and has endured net losses totaling nearly SU$1.2 billion for the year; since the third quarter of 2007, Sprint has shed a total of 3.5 million customers, and the company’s wireless segment has lost US$645 million so far in 2008. Sprint’s stock price has dropped by more than 86 per cent over the past year and currently stands at just above US$2 per share.

What’s gone wrong: For the past couple of years, Sprint has faced myriad problems, from continued difficulties in integrating former Nextel users into the Sprint network to challenges in delivering quality customer service to a shrinking subscriber base. The result has been a steady drop in both net earnings and customers for the carrier, which is now the third-largest in the United States with just more than 50 million wireless subscribers.

The turnaround strategy: Sprint CEO Dan Hesse, who took over the company late last year, has made improving customer service his top priority, and has also been working to make some improvements in Sprint’s voice and data network quality. Earlier this year, Sprint won an award from consumer ratings group J.D. Power for having the highest wireless call quality in the southwestern United States, and J.D. Power President Steve Goodall said that Sprint had shown quality improvements in five of the six major regions throughout the United States. The company is hoping that spinning off its WiMAX division into Clearwire’s US$14.5 billion mobile broadband venture will free up more resources that it can put into marketing and in network upgrades.

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Jim Love, Chief Content Officer, IT World Canada

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