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Tight Capital Could Squeeze Firms Out of RFID Industry

This conclusion of a two-part series on how economic conditions are affecting the RFID industry examines how tight capital and an extended bear market could impact the RFID vendor community. Part 1, , analyzed how current economic conditions are impacting near-term RFID adoption prospects.
Nov 05, 2008This article was originally published by RFID Update.

November 5, 2008—Despite the economic downturn, the long-term RFID growth prospects are still very strong, and some industry professionals think current conditions could spur adoption in some segments (for details, see Part 1 of this series: Economic Meltdown Effect on RFID: Not Now, Not Ever?). However, some RFID solution providers might not survive to see it, at least in their present forms. If tight capital markets persist, many RFID firms might pursue defensive mergers, while well-funded ones could find conditions favorable for acquisitions. Merger and acquisition opportunities could dry up in an extended bear market, leaving some firms to fail. These are the broad scenarios laid out by RFID and financial industry professionals contacted by RFID Update.

To understand how capital and equity markets impact the RFID industry, it is important to review its fundamentals. RFID provider consolidation is expected, as is typical for the lifecycle of fast-growing, immature technology industries. Many RFID industry leaders are private, venture-backed firms that in varying degrees rely on capital from investors (as opposed to sales revenue) to fund their continued operations. Notable private firms in the industry include Alien Technology, Impinj and most RTLS technology providers. The publicly-held companies in the industry (the largest include Avery Dennison, Intermec, Motorola, NXP, Texas Instruments and Zebra Technologies) are not focused solely on RFID, and at most RFID accounts for only a small part of overall revenues.

Private firms could face difficulty in raising funds in the tight private equity market, and public firms could find it hard to compete for corporate resources with areas of their companies that account for more revenue, especially when faced with investor pressure to raise depressed share prices.

"Access to capital for companies that are not well positioned and profitable is going to become much more difficult," Reik Read of Robert W. Baird & Company, one of the leading investment firms that follows the RFID industry, told RFID Update.

"I do get a sense that private equity money will be tightening," Bill Colleran, CEO of privately held Impinj told RFID Update. "We feel very fortunate that we have a strong balance sheet and aren't seeking funds right now."

When Impinj competitor Alien announced it received $38 million in new venture funding in October (see Alien Gets $38M in New Funding, Brings Total to $329M), Alien CEO George Everhart told RFID Update "It's better to be lucky than good," regarding the timing -- noting the deal started in July, before the most severe macroeconomic problems surfaced.

Without infusions of capital, privately held firms may be at risk of failing because they typically lack the cash reserves to withstand a slowdown in sales. One such RFID firm, VeriChip, essentially liquidated itself this May (see VeriChip Sells an RFID Business, More Change May Come and Implantable RFID Business 'Not Self-Sustainable').

Investors in private firms typically cash out either by taking the company public or selling it to a larger firm. 2008 was already a weak year for IPOs before the stock markets crashed this fall, making acquisition a more likely scenario. Read thinks current conditions could be a catalyst for RFID market consolidation.

"Keep in mind there are large companies out there with good balance sheets who are looking for opportunities," Read said.

Intermec has made several important acquisitions throughout its history and ended the recently-concluded quarter with $202 million in cash in the corporate treasury. Motorola is struggling but its RFID business is doing well and the company continues to make acquisitions. Cisco Systems has beefed up its RTLS offerings and has historically been aggressive in making acquisitions, as has Microsoft on the software side.

In July, Zebra secured $100 million in five-year revolving credit. The company already had a strong balance sheet and cash reserves, so the deal caused speculation that it might make more acquisitions, following its buys of RTLS providers WhereNet, MultiSpectral Solutions and complementary software providers in recent years.

However, weak stock markets may make public companies more conservative, according to Impinj's Colleran.

"Tough economic conditions could accelerate the industry consolidation process, but it cuts both ways," he said. Typically, a public company buys a private one, using its stock as currency. If a company feels its stock is undervalued, it may not want to use it to make purchases, because it will have to issue more shares than it feels the deal is worth."

At least three private RFID companies have been acquired by public firms this year. Two of the deals occurred before the market meltdown, while the third closed in October. For more coverage of these deals, see: All sources contacted by RFID Update noted there is no evidence that wide-scale consolidation is imminent, and said conditions in the RFID industry are generally good. The scenarios presented here represent what could happen if there is a prolonged economic slump. It is too early to tell if that will occur.

"The December-January timeframe will be very important for answering a lot of the questions that are being raised now," said Read. "For example, there are steps being taken now to shore up the credit markets, and by then we should start to see the impact. To the extent RFID companies can weather the storm, and get costs out of their business, they'll be fine."
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