Watch CBSN Live

6 U.S. Downgrade Dangers for High Tech

S&P's downgrade of U.S. sovereign debt isn't the biggest problem facing the country -- the economy is. Some even think that any resulting shock may be short lived.

That could be, but expect that high tech is going to take this one on the chin. After effects will hit technology companies in the wallet in multiple ways. Here are six that will cause boardrooms to pass antacids bottles.

Borrowing costs
Treasury notes yields actually dropped, rather than increasing as you might have expected from downgraded credit. Demand for stability trumped the immediate increased costs. S&P may have lowered the rating, but Moody's hasn't and, lower rating or not, investors are nervous. They're heading to T-bills and gold and out of investments perceived as riskier.

If equities are considered too risky, are corporate bonds going to be any better? It won't matter to such financial giants as Apple (AAPL), Microsoft (MSFT), Google (GOOG), or IBM. Their bank accounts are big enough to fund anything they need out of pocket. But smaller companies will feel the pinch. Remember tight credit from 2008? Don't expect it to suddenly loosen up.

Less government money
Government money directly and indirectly fuels high tech, whether in the form of grants to university research that provides innovation for eventual commercialization, direct purchases of products and services, or programs that support global commerce. All of these and others will take a heavy and sustained hit as the feds try to balance the national checkbook. Tech companies will see reduced revenues, increased operating costs, and lowered innovation for future products and services.

Sky-high prices for gold and platinum
People have focused on the record high prices for gold. It's nearly doubled in price since 2009 and it's up 3 percent this morning alone. Platinum is even more expensive, though only by a few dollars.

High tech depends on gold and platinum as well as other pricey materials. When their prices go up, so do cost of goods. Because of market pressure, products won't have room for price increases. Lower profits for the manufacturers will be the result.

Chinese renminbi continues to climb
The U.S. tech industry depends on China as a major location for outsourced manufacturing. Over time, the value of the renminbi compared to the dollar has increased. The chart below from Google shows how the renminbi has gone up roughly 5 percent since early 2010 (click to enlarge):

The current U.S. debt downgrade will likely only support and even increase that trend. Similar to gold and platinum prices, it will drive up cost of goods on products without the room to raise prices. Margins and profits will suffer.

Stock prices
There's been a global stock sell-off as nervous investors look for more stable places for their money. It's bad enough that the G-7 nations feel the need to calm people to keep things from getting worse.

Tumbling stock prices have a number of impacts on high tech companies. When prices are down, it is more difficult to go to the equity markets to raise additional money (although it does make buy-back programs cheaper for the corporations). That means undertaking debt and paying more.

Stock prices are often part of financial covenants in loans and other debt vehicles. If prices drop too low, companies may owe additional money or entire debts may be called for repayment.

Stock also is an important part of employee compensation at tech firms. Morale sinks as prices drop. Corporations will likely have to consider paying more cash to get the employees they need, increasing overhead expenses.

Nervous VCs and investors mean tough IPO times
As the big sources of investment money get spooked and become more conservative, they, too, will shift capital into safer outlets. Start-ups will find it harder to get seed and early round money to build their businesses. If anything, venture capital will concentrate on the small portion of companies that look as though they will be successful.

And those companies will need the extra money because IPOs are going to be a problem. If Apple is down nearly 3 percent this morning, who's going to be interested in stock in a company like Groupon that hasn't been able to show a profit?


Image: morgueFile user cohdra, site standard license.
View CBS News In
CBS News App Open
Chrome browser logo Chrome Safari browser logo Safari Continue