With banks turning off the spigots, Hewlett-Packard Co. is getting used to playing a bigger role as financier to smaller tech companies scrambling for cash to buy its products.
As the turmoil in the capital markets continues and the uncertainty of recession looms, a growing number of technology titans are finding their own internal leasing and financing programs are in hot demand.
“We're one of only a couple of players in the industry that actually owns and writes our own paper,” said Geoff Kereluik, vice-president of marketing for HP Canada Co. “That gives us a tremendous amount of latitude in terms of how much risk we ultimately want to take on. … We expect that there will be a greater uptake in our various leasing offerings.”
But for every company like HP that finds itself in the enviable position of having both cash on hand and the ability to offer vendor financing, there are many others that wish they were in a position to take advantage of the opportunities being presented by the tight credit markets.
Companies such as Nortel Networks Corp., which at one point owed their success in large part to these programs, have gotten out of the vendor financing game altogether.
Others simply don't have the resources to make the most of the current financial situation.
Still, some of the largest companies that have dedicated leasing and financing businesses aren't committing to either expanding or retracting their operations in this area just yet.
Even among tech heavyweights, the disparities are stark when comparing companies such as HP, where the financial services division accounts for just $2-billion (U.S.) of the company's $104-billion total 2007 revenue, and other firms such as Xerox Corp., where vendor financing is the lifeblood of the company.
Revenue from “post-sale, finance income and other revenue” at Xerox accounted for $12.4-billion, or 73 per cent, of the company's total sales in fiscal 2007, according to the company's annual report.
But the company hasn't made any plans to drastically alter its financing business, said Tom Oldfield, vice-president of graphic communications for Xerox Canada.
“A very significant portion of our business is already written on Xerox-financed paper … the vast majority,” he said. “We don't really have any specific plans to make it a higher or a lower percentage of our business.”
International Business Machines Corp. is stepping up the promotion of its financing business on its website, including a section that explains how a company can incur favourable tax treatment by investing in the company's server and storage technology to consolidate old servers. The company is also offering certain customers the choice of a three-month, no-charge deferral or a lower financing rate on lease terms longer than 36 months.
IBM closely monitors the credit histories of its clients and adjusts its own agreements as needed, chief financial officer Mark Loughridge told investors during a conference call on Oct. 16.
Most of the assets that IBM leases to other businesses are “critical IT operations and have substantial value,” he said. Still, the company's global financing division accounted for only about $600-million, or 2.5 per cent of the company's overall business, according to the company's most recent quarterly report.
“Our leases are non-cancellable and we are financially protected in the event of a merger or acquisition,” he said.
Unlike the tech wreck of 2000, when many hardware vendors watched as their clients declared bankruptcy and stopped paying their bills, the current economic crisis won't be quite as rough on the sector, Forrester Research chief executive officer George Colony wrote in a blog post earlier this week. “Users of technology are far more disciplined and have cut out the nonsense,” he said. “So yes, growth will be slow, but it won't fall off a cliff. If you don't believe me, start unplugging wires at your company and see how long you can develop, manufacture, deliver, sell, and service your products.”
It is a different story on the telecom front. Equipment makers supplying phone companies have been weaning themselves off vendor financing, a practice that added to their pain in the last downturn.
In the summer of 2002, when Impsat Fiber Networks Inc. filed for bankruptcy protection, Nortel Networks Corp. found itself as the largest single unsecured creditor to the phone company. Nortel had lent $220-million (Canadian) to Impsat to help it buy Nortel equipment. The largest bank with unsecured exposure, by contrast, was Citibank, on the hook for just $8-million.
Like other telecom gear makers, Nortel has since learned its lesson. “We do not participate in vendor financing,” spokesman Mohammed Nakhooda said. Instead, the company uses third-party lenders to help with some deals, he said.
Nokia Corp. was carrying €6.6-billion ($10.4-billion) of vendor financing coming out of the tech bust in 2001. It has successfully cut that amount to zero, thanks to the determination of Rick Simonson, who was hired as chief financial officer specifically to bring under control the practice of lending to customers.
Mr. Simonson says Nokia has no intention of doing any more vendor financing. “I'm not a bank,” he told analysts on the company's quarterly earnings call this month.
Nokia has chosen its suppliers, trade customers and distributors based in part on their financial health. In addition, most of the major phone operators have good financials today, after paying down debt and boosting their cash, Mr. Simonson said.
For the moment, the company is content to let governments and central banks manage the credit crisis.
“There's no doubt that one of the troubling impacts in the overall financial crisis is this freeze in liquidity in certain markets. But I think the actions that the governments have taken on a more co-ordinated basis here are starting to show signs of improvements,” he said.
