Companies trampled by the retreating financial markets won a reprieve last week from the Nasdaq, which temporarily suspended its delisting policy.
Following Wall Street's downward spiral in the aftermath of the Sept. 11 terrorist attacks on the United States, the exchange said it would implement an across-the-board moratorium on delisting procedures for companies that fall below the $1 minimum bid price for 30 consecutive days. The suspension, effective Sept. 27, will last until Jan. 2.
"The entire industry has been negatively impacted," said Bruce Goldberg, president and chief executive of All American Semiconductor Inc. "[Venture capitalists] are not giving out any money, and banks are not lending." The Miami- based distributor has seen its stock price fall in the last few weeks from a 52-week high of
nearly $22 to slightly more than $2.
Approximately 550 Nasdaq companies, or roughly 13% of those listed on the exchange, were trading below the $1 mark as of last Wednesday, according to data available from investment research firm Multex.com Inc., New York.
The news was a mixed blessing for the industry. On one hand, companies that have seen their shares plummet to all-time lows were relieved that they would not run the risk of being dropped from the exchange if their stock prices near the $1 per share danger level, executives and analysts said.
"If you're not listed on the exchanges, you have much less visibility in the market and to potential investors," Goldberg said.
On the other hand, it's painfully clear that the high-tech sector will have to continue to search for alternative funding measures until investors' confidence returns and demand picks up.
Without access to the public markets, companies will be forced to look for private placement funding, re-turn to their original investors for additional operating capital, or cut costs. At the same time, they must maintain some level of research and development or risk being outpaced by competitors, said Vinay Asgekar, an Irvine Calif.-based analyst at AMR Research Inc.
"Just because Nasdaq eases its delisting criteria doesn't mean companies will get more access to the capital markets," Asgekar said. "We're seeing companies put survival strategies in place."
R&D on the rise
For some, those strategies entail an increase in R&D levels and a run into new product areas with longer-term demand potential.
Flash memory maker Catalyst Semiconductor Inc., which has seen its stock drop from about $10 last November to less than $2 this month, is considering increasing its R&D spending as a way to position itself for future growth. R&D currently represents about 4.5% to 5% of its $98 million in revenue, about half of what its competitors budget, said Barry Wiley, vice president of marketing at the Sunnyvale, Calif., supplier.
Catalyst, which cleared its debt this summer and has about $28 million in the bank, is pumping up development efforts in digital programmable potentiometers and mixed-signal RF products.
"We're being prudent but aggressive in terms of introducing new products," Wiley said. "We're looking at how we can position ourselves when we come out of this weak market and growth accelerates."
Expanding through acquisition
Merger and acquisition activity is also likely to increase as more companies shutter operations and others try to broaden their technology portfolios, AMD's Asgekar said.
"If companies turn to venture capitalists or private placement, they'll likely have to give up much of their management control," he said. "If they're going to lose control, they may decide to go the acquisition route instead."
That may be good news for RF Industries Ltd., a San Diego-based coaxial connector and cable assembly supplier that posted sales of $8.9 million last year. Acquisitions are still part of the company's plans, said Howard Hill, president and chief executive.
"We've been actively pursuing acquisition discussions," he said, adding that the company is seeking targets that would boost its wireless offerings. "We bought a small company in December and expanded our cable assembly operations. We're going to continue to look at mergers and do our due diligence and analysis of the situation."
How well mergers and acquisitions will be received on Wall Street is still unclear, said Ambrish Srivastava, an analyst at ABN Amro in San Francisco.
"The weaker players will not be able to sustain their business models. How can you continue to cut costs and still remain competitive?" Srivastava asked. "Minor acquisitions may get [favorable] recognition on Wall Street. However, the market is not rewarding companies that make major acquisitions right now. Look at the HP/Compaq deal."
Last month, Hewlett-Packard Co. said it planned to acquire rival Compaq Computer Corp. in a stock deal initially valued at $25 billion. The deal did not win Wall Street's support, and as of last week its value had fallen to $17 billion.
Despite the market jitters, other companies are finding that their existing investors are willing to hold their cards a while longer.
A few weeks ago, for example, ON Semiconductor Inc. said it had received a $100 million investment from Texas Pacific Group, a private-equity investment firm and ON's majority stockholder.
"We are extremely pleased that our majority stockholder has demonstrated its continued commitment to the company," said Steve Hanson, president and chief executive, in a statement. "When coupled with our recent efforts to improve our cost structure, we believe we are in a strong position to meet the challenges posed by the recent economic downturn, and enhance our competitive position."