Technology big businesses taps a rich investment seamby
Large technology businesses are benefiting from ongoing financial investments in other enterprises.
Almost 40% of them have channeled a stream of extra cash into three preferred areas, in almost equal proportions: incubation programs; stocks of publicly-traded companies; and private investments, according to PricewaterhouseCoopers’ latest survey*.
And, compared to their peers without external investments, they have achieved far higher revenue growth, much greater productivity, and considerably more direct revenues from eBusiness.
“This is a virtuous situation, where success begets success,” said Paul E. Weaver, global technology leader for PricewaterhouseCoopers (PwC). “Companies that took initial financial risks with others have prospered, and this has enabled them to build a continuing external investment program into their operations.”
Three types of corporate investing are practiced by these large technology businesses:
• 15% are active in a formalized business incubation program.
This involves taking a stake in start-ups located in a separate, sponsored facility, where they are exposed to a regimen of services to accelerate growth. Most executives so invested (78%), say the incubator is part of a strategy to eventually bring externally-developed technologies, processes, products or services into their business.
“This is a noteworthy percentage of large technology businesses embracing the concept of incubation,” said Weaver. “They recognize they can’t hope to develop all needed innovations entirely on their own. They are looking for a hands-on stake in synergistic start-ups likely to yield a big dividend down the road. Those investing in their own incubator, though already 20% above the norm in size, have generated five-year revenue growth more than three times above the average.”
Most of the incubators receiving investment have been designed internally (78%). However, 13% were custom-designed by an outside consultant and nine% were adapted from a model in use elsewhere. Almost all incubator sponsors (83%) expect viability of start-ups within two years.
Corporate executives seldom manage their incubation programs as extensions of their R&D department (only 22%). Instead, they are run as either new product development programs (39%), as part of a business investment strategy (35%), or as separate, freestanding programs (30%). Looking ahead, 61% expect to increase their incubation program over the next 12 months, 26% plan to maintain its current size, and none will be cutting back, though 13% are not sure.
• 16% have a securities investment portfolio for which they buy and sell stocks of other companies.
The average portfolio includes shares of 20 other companies, and has been in operation for five years.
Income from investments in securities averaged 2.5% of total corporate revenues over the past year, and is expected to grow to 3.6% over the next 12 months, an increase of 44%. During this same period, a 21.7% average rate of return is expected.
Looking ahead, 50% expect to increase investment in this program over the next 12 months, 21% plan to stay about the same, 8% will be decreasing, and the remaining 21% are not sure.
“It should be noted these investments are financial and corporate,” said Weaver. “They are not part of a 401(k) investment program for employees.”
• 18% have a formal or informal fund making private investments in businesses with products, services or technologies attractive to their own corporate objectives.
The total number of investees is limited, averaging 15 companies. Most (74%) view these investments as having strategic implications, while only 19% see them as being financial in nature.
As a part of this investment strategy, nearly all (89%) take an equity stake, of typically less than 10%. Investments are made in businesses of all sizes: start-ups (82%), midsize companies (19%), and other large public companies (19%).
The majority (52%) does not have a limit on the dollar amount that can be invested in any one company; 44% have a limit, and 4% did not report. Looking ahead, 67% expect to increase investment in this program over the next 12 months, 19% will stay about the same, none will be cutting back, and the remaining 14% are not sure.
“The large technology businesses involved in one or more of the three corporate investment programs we’ve described have brighter prospects and higher productivity than those without one,” noted Weaver.
Collectively, these businesses have:
• 36% higher revenue growth projected for the next 12 months - 23.0%, versus 16.9%, respectively;
• a 33% productivity advantage - revenues-per-employee of $482,000, versus a norm of $362,000; and
• a 20% higher share of revenues coming from eBusiness over the next 12 months - 15.7%, versus 13.1%.
• 37% more are planning to expand to new markets outside USA - 52%, versus 38%; and
• 55% more are considering purchase of another business over the next 12 months - 62%, versus 40%.
“These businesses are excelling because they have been willing to risk their hard-won gains in outside investments,” said Weaver.
* PricewaterhouseCoopers’ “Technology Barometer” is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research.
PricewaterhouseCoopers is the world’s largest professional services organization. Drawing on the knowledge and skills of more than 150,000 people in 150 countries, it helps clients solve complex business problems and measurably enhance their ability to build value, manage risk and improve performance in an Internet-enabled world.