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Over the weekend, the IT world was transformed. Chances are you didn’t notice. No, Vista SP1 wasn’t released, neither was XP SP3, nor the beta of Ubuntu 8.04. What did happen was that on Friday, March 14, the major Wall Street bank Bear Stearns collapsed.
Bear Stearns has invested billions in two hedge funds that were built around sub-prime mortgages. Even as it became clear that holding onto sub-prime mortgages was like hanging onto an anchor, Bear Stearns decided to pour even more money into its sub-prime mortgage funds.
To put it another way, with only a pair of twos in its hand, Bear Stearns decided to go all in. They lost. Even on March 14, when it was becoming clear that Bear Stearns was in real trouble, CEO Alan Schwartz was swearing that the company would show a profit in the first quarter. Sure it was.
At the beginning of that week, Bear Stearns was selling for $70.28 a share. By Friday evening, it was selling for $30 a share. Over the weekend, with the U.S. government giving JP Morgan Chase a $30-billion guarantee it would make up any of Morgan’s losses, Morgan agreed to rescue Bear Stearns from bankruptcy for… $2 a share. For those keeping score at home, a company worth more than $8 billion Monday a week ago was just sold for $236 million.
Now, what does all that have to do with our cozy world of IT? Everything.
Everyone needs money to make money. Even Microsoft, if it’s successful in buying Yahoo, may need to borrow money. Now Microsoft can find a bank willing to loan it a billion here or there. What about your company?
Can your business dig up the cash to upgrade your servers? What about Vista? It’s not cheap, even after the mostly cosmetic price reductions. Besides, where are you going to get the money to buy new systems that can run Vista anyway?
Even if you do get new hardware and software, who’s going to install and maintain it for you? Unemployment is on its way up. It’s not that there’s not work needing to be done, it’s that employers can’t afford the staffers they do have. In 2007, IT workers salaries grew a pathetic 1.7% percent.
This might mean good news for resellers and integrators if businesses turn to outsourcing for their IT needs. On the other hand, if things get bad enough-and I fear they will-I doubt anyone will be buying new hardware or software, hiring staffers or contracting with channel partners.
There’s another angle here as well. We’ve been seeing a lot of merger and acquisition activity in the technology business in the last months. Sun buying MySQL, Arbor Networks acquiring Ellacoya Networks, and IBM picking up single sign-on vendor Encentuate. I can’t see that trend continuing.
The Feds keep pouring money into banks to save them from their lousy sub-prime mortgage banks, but how long can they do it? The Feds and JP Morgan threw together an emergency bailout for Bear Stearns, but what if Lehman Brothers, which is also in hot water, reports poor earnings tomorrow?
I foresee a major drop in all IT spending for the rest of the year coming. Even if you just got your budget approved, don’t be surprised to see it cut.
Brace yourself, ladies and gentlemen; we may be in not for a recession, but a full out depression.