A great divide is opening up among technology companies.

The sector has previously been largely unaffected by the downturn, but as the recession begins to bite, it is highlighting a gulf between the fortunes of the larger companies and their small rivals.

As large companies with strong records, Logica and Misys were able respectively to reduce and refinance their debts, while Micro Focus International was able to find funding for two acquisitions.

By contrast, the plight of the small-cap technology sector was underlined on Wednesday when two stocks suspended their shares on Aim.

AT Communications halted trading because of an impending clarification of its financial position after the potential buyer in an asset sale made a further claim that could cut the price.

Meanwhile, Artilium, a small telecoms software group, warned that it might no longer be able to continue as an Aim stock after a disagreement between Robert Marcus, chief executive, and Fred Mulder, non-executive chairman over financing strategy.

AT said that it was seeking advice on the merits of the claims from Nimans Holdings, which it estimated at £3.62m. The deal, agreed in March for £12.45m, is crucial to the group's reducing its net debt of £18.1m.

AT Communications is to date the most significant company to hit problems in the sector.

Multi-year contracts signed in boom years have continued to deliver revenues. But as customers delay decisions on new projects or clamp down on discretionary spending on existing ones, there is pressure on volumes, prices and cash flow.

Micro-cap Cantono was forced into administration after selling its last asset to Scottish & Southern Energy Telecom for £4.9m, in spite of operating in hosting services, one of the strongest areas of the tech market.

"We should not kid ourselves that things are anything other than tough out there and getting tougher," said Ian Spence of IS Research. "Working capital management is becoming a real headache."

As a late cycle industry, many fear that the hard times are just beginning. "We continue to believe there will be a 'double down' in the second half as the recession really starts to bite," said Mr Spence.

Simon Russell, managing director at boutique technology investment bank Thomas Weisel Partners, said: "We're seeing a Darwinian and discerning market in both debt and equity capital markets. Some, such as Micro Focus, are getting debt or equity financings away. Other placings are not finding the funding."

Source: FT

Sean Duffy, head of technology, media and telecom at Barclays Commercial Bank agrees: "It's always been harder at the small end of the market to secure debt for small companies as cash flows and balance sheets are so much weaker," he said.

Companies have learned from the technology recession at the start of the decade.

"Many learned then to survive without much cash, but strong cash management and operational delivery have never mattered more than now," Mr Russell said.

Labels: Artilium, AT Communications