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Wall Street Meltdown: Why It’s Bad for Tech (Part Two)

September 16, 2008

In the short run, the market for technology just shrank. Wall Street has always been a big buyer and believer in the power of technology. In fact, Lehman boosted its tech spending in the quarter ending August 31 even as it headed toward bankruptcy. Financial services firms account for a whopping 18 percent of overall IT spending, according to Forrester Research, with Wall Street firms making up a third of that.

And now that three of the America’s top five investment banks no longer exist as independent entities, the demand for those products and services will be materially diminished. Check out this list of tech companies with the highest percent of revenue generated by financial services firms, which was published in November 2007 by American Banker and Financial Insights.

Information technology services firms such as Infosys, Wipro and Satyam Computer Services, and computer server makers such as Sun Microsystems will be particularly hard hit. According to Indian industry lobby group Nasscom, the banking, financial services, insurance, and telecom sectors account for at least 60% of Indian IT firms’ revenue.

Tata dervived 60% of its revenue from financial services, while Cognizant gets 48% and Infosys gets 37%, according to the American Banker survey. This week, shares in Satyam have dipped 15% to $18, while Wipro’s stock has taken a 12% hit since last Thursday.

American tech service firms such as Unisys and payment processors Fiserv and Diebold–who all rely on Wall Street for a lot of their sales–are vulnerable as well. Since Monday, shares in Unisys have fallen 13%, while Diebold’s stock is down 12% since last Thursday’s close.

What’s more, the financial services industry is the largest purchaser of computer servers, accounting for 25% of worldwide server revenue, according to Gartner. Over the last two days, shares of Sun have dropped 12% to about $8.40. And today, shares in Dell, a big maker of servers, plummeted 10% as the company admitted that customers are cutting back on tech spending.

Last year, banks delayed or cut back on some projects but they did not slash spending. Now, bigger cuts in server spending are inevitable. Those cuts, of course, will have negative ripple effect on the software industry, which supplies programs that make those machines run.