More bad news for the "Tech is Different" crowd. Seems that the typical small tech company has been less vulnerable to default than other companies with similar financial profiles - until now.

In a report today, credit rating agency S&P puts the favourable historic pattern down to a couple of things. Small (junk-rated) tech companies tended to get acquired more than those in other sectors. They also benefitted from cheap finance in the form of convertible debt (a function of the sky-high expectations often built into share prices.)

Both those factors have been going away since the end of the bubble, says S&P - a result of what it calls the "maturing" of the industry. Bank loans and other forms of straight debt are becoming more common, and leveraged buy-out firms are competing for acquisitions. Higher default rates will be a natural result.

Of course, you could turn this on its head. As leverage rises, equity investors should see higher returns. It’s not all bad news - but it’s another sign of how the pressures on tech companies to drop their traditional financial conservatism are making them more similar to those in other industries.

April 10th, 2007 in Tech Finance | Permalink