Winter arrives
I've said before that we were in for a long cold winter. Well TaDa! Here we are.
Marc Farley throws a couple ideas around as to how the economy falling into the sea could re-order the universe.
I've been thinking about this for the past couple of months and one of the differences I've noticed from the last one?
This time it's not a spending crunch, it's a credit crunch.
Smaller businesses who usually find opportunity when an economic landslide knocks the big players for six might not be able to capitalise on it as easily as they usually would as it'll be very difficult to get a credit line in place to expand their business in order to serve the increased opportunity.
In our business you have to spend a lot of money before you can make any money. Expansion requires a significant level of investment before you'll see any real return.
Right now lenders are not only suspicious of customers but also suspicious of other lenders so there is very little liquidity in the system. Everyone is risk averse.
VCs are also going to start pulling the plug on startups early in the funding cycle. What's floating around out there is if a VC can't flip a company quickly they're not inclined to go beyond a B round of funding so they'll pull the plug. Most of them would rather double down on the long term plays which are well along and could gain some share as well as make it to an IPO when the clouds lift, rather than try and launch something new out into a brutal market place.
Back in 2000/2001 we had a lot of excess storage capacity in places where people had bought forward with a view to a long boom which didn't happen.
Some of those outfits folded, some sold off gear at bargain basement prices while others held on to it and used it as a buffer which they ate into over a longer than expected period of time but the result was that spending stopped as there was too much unused storage capacity, compute power and network bandwidth just sitting idle.
When things started moving again we saw a shift to mid-range product for a vast swath of customers who's IT budgets were slashed to the bone when other parts of the business decelerated. For EMC this kicked off the great Clariion expansion where it went from 6% market share to being the market leader for 17/18/19 (I can't recall) quarters in a row last time I checked.
This time around no-one is talking about excess capacity but they will get serious about capacity optimisation if they haven't started investing in it already so sales will continue.
These days I also don't know of anyone who doesn't lead with their best price. The profit taking days of pre-crash never returned, it changed the market drastically in favour of the consumer (Who now expect a lot of what you might call "consulting" thrown in for free during the pre-sales engagement and a lot of software + services when the deal closes) so those hoping that they're going to get some great bargains could be in for a shock as I expect pricing will hold it's ground across the industry.
You're not going to get something cheaper tomorrow than you would if you bought it today. We passed that boundary years ago.
As for Cisco buying EMC, I never got the impression that Cisco saw the margins as being high enough for them.
Oh I fully expect consolidation to occur but it could be tough to buy anyone in this climate unless your offer is quite quite generous. If it isn't most shareholders will accuse you of trying to low ball them and would immediately move to block any acquisition attempt knowing that the price will organically rise when the market itself rises.
When people do start consolidating we might see some crazy numbers thrown out there in comparison to what the market cap looks like but if you want a deal done those you are buying from shouldn't feel like you're trying to mug them.
