Facebook (FB) Stock Aftermath: Is the High-Tech Industry Too Big to Fail?
On the heels of the rocky Facebook IPO, the question has arisen as to whether the high-tech industry poses any “too big to fail risks” for our economy or our government. There are many ways to analyze the impact of these companies on our lives. This essay will briefly consider whether government intervention might be necessary because of any of the following contingencies in the high tech industry: financial problems, operational mishaps, strategic crises, stock market response to a problem, trickle down impact, privacy considerations, and human resources issues.
Financial Risk. The Facebook IPO was a landmark event. And so, the high tech industry, Wall Street, regulators and investors (institutional and retail) followed the transaction with great interest. After all is said and done, FB does not pose a financial risk to the country. The company is well capitalized with a market capitalization of about $87 billion, and it has $4 billion of cash on hand, versus $1 billion of debt. Whether or not FB becomes a force in the high-tech sector remains to be seen, but its IPO has provided it with liquidity to operate, a source to cash out early investors and a currency to make new acquisitions.
What about the other large companies in the high-tech space? Do they pose any financial risks, or any other risks, that could possibly involve a federal government bailout? Check out the following chart.
Leading American Tech/Internet Companies ($ in billions)
Revenue
Net Income
Cash
Debt
Mkt Cap
Apple
142
39
28
0
525
Microsoft
73
23
58
13
244
Cisco
45
7
48
16
88
40
11
47
8
192
Oracle
37
10
30
15
130
IBM
106
16
12
32
224
Intel
54
13
14
8
129
4
1
4
1
87
Total
501
120
241
93
1,619
Unlike most American corporations, the companies in this group operate with very little leverage. The chart consists of the largest companies in the space, which have a combined market capitalization of over $1.6 trillion, while carrying debt of under $100 billion. Moreover, the cash reserves of these titans totals almost $250 million, nearly 2.5 times the debt of all the companies combined. Operationally, all of the participants have high revenues, Facebook being the smallest of the group by a wide margin. Another important observation is the staggering profit margins of the companies; in the aggregate, they earn $1 for every $5 of revenue. All are extraordinary generators of cash flow as capital expenditures and debt service are relatively low.
Keep in mind that current profit margins and liquidity are important from a creditworthiness perspective, but higher stock prices are based upon revenue and profit growth.
The conclusion to draw from the aforementioned is that none of these largest high-tech companies pose any threat to the country from a financial point of view.
Let’s now consider some of the other problems high-tech companies might encounter.
Operational Risk. The companies that provide active interfaces with governments, businesses and individuals such as computer platforms and communications systems could impair the infrastructure of the country and even the world if they went down.
Strategic Risk. Many of the companies in the group interface with those performing high-tech research and development. The impact of failure of one of these companies on the plethora of critical projects being conducted at any given time, in defense, military, sciences and others, could be devastating.
Stock Market Risk. Poor stock market performance by any of the companies could have a meaningful impact on the overall stock market and result in the loss of billions of dollars.
Trickle Down Risk. The high-tech industry depends upon thousands of companies for supplies, contracted work, applications, etc. The failure of one of the companies could have a massive cascade effect on other companies throughout the country.
Privacy Risk. Many high-tech companies collect data from individuals, businesses, and the governments. Inappropriate use or handling of said data could pose a huge risk to those involved. Think credit cards, health care records, bank records, etc.
Human Resources Risk. Although most high tech companies are not people intensive, some are, and all of them do business with other companies that employ millions of people. A failure could result in massive job losses.
This brief analysis should lead us to believe that the high tech industry is too big to fail. Ironically, it is not so from a financial perspective, the reason most companies fail. Rather, high-tech companies are deeply involved in so many aspects of our lives and corporations that their smooth operations are a blessing, and a failure would create terrible problems and require government intervention.
