Hi-tech firms see funds dip

Stock market losses raise fears of cash crisis
Click to follow
The Independent Online

The recent collapse of new economy stocks could undermine the ability of cash-strapped hi-tech companies to raise more funds, and leaves them in danger of running out of money, a study of the sector reveals.

The recent collapse of new economy stocks could undermine the ability of cash-strapped hi-tech companies to raise more funds, and leaves them in danger of running out of money, a study of the sector reveals.

The table attached, compiled by Shares magazine, shows some of the companies whose losses are beginning to deplete what's left of their cash reserves. By comparing current losses with cash reserves, the table shows at least 11 members of the techMARK index whose cash position is becoming tight, to say the least.

Of course, the figures may be misleading, particularly if the companies succeed in turning losses into profits. Nevertheless, at a time when stockmarket turbulence has undermined the ability of loss-making companies to raise money in the equity markets, the state of hi-tech companies' finances is suddenly a cause for concern.

A case in point is JSB Software Technologies, a market leader in controlling internet access. The losses of £12m for the previous nine months which it announced in February, suggest that the company had better act fast before its cash reserves of £22m disappear altogether. Also, its ability to raise more cash from the equity market has been undermined by its share price's sudden 60 per cent fall.

It is significant that those companies whose need for extra funds is apparently most desperate are not so much the dot coms, most of which have only recently come to market, but constituents of the longer-established biotech sector like Phytopharm and Xenova.

But even some of the recent stockmarket arrivals ought to keep a tight watch on the purse strings. Lastminute.com, for example, has revealed losses for the first quarter of the year of just over £11m. At that rate, its cash reserves of £131m do not represent a bottomless pit.

Even a company like Baltimore Technologies, now one of the FT-SE 100, may be forced to risk returning to the stock market in the next few years.

But some companies were ahead of the game. QXL, the online auctioneer which floated last October, took advantage of its stellar debut, raising another £40m last February by placing a tranche of shares with institutions.

Other investors had less cause to celebrate the success of hi-tech companies in raising extra funds at the top of the market. Redstone Telecom, for instance, the network operator, recently raised £121m with a rights issue pricing its shares at 530p. The shares have since tumbled to 447 1/2p, leaving subscribers sitting on a hefty loss.

Internet entrepreneurs are fond of declaring their indifference to the stock market and the exorbitant valuations placed on their companies, much to the incredulity of more sceptical observers.

But even if a rising share price is not important, a falling one most certainly is. Internet companies in particular, and hi-tech stocks generally, have traditionally struggled to raise funds by borrowing, since bank managers are understandably loath to lend to companies lacking both physical assets and profits.

So, in recent years, these new economy companies have preferred to generate their funds via a stock market hungry for such growth investments, and selling more shares would be the obvious way for companies to replenish their coffers. Unfortunately, the sell-off of hi-tech stocks suggests that even this avenue may be blocked.

Comments