Casting a watchful eye over recent events, Julien Rye, an audit partner at BDO Stoy Hayward who specialises in the technology sector, agrees that consolidation will inevitably slow down and warns that we can expect to see some big name business casualties thrown into the mix too.

"I probably shouldn't say this but there are good times ahead for the business recovery sector," he says. Rye predicts that more technology firms will go bust in the current market climate with those trading in the US as well as Europe having to consider adjusting their next set of quarterly results, which may be significantly marked.

From liquidity to liquidation

Recently, the US Federal Reserve stepped in and lowered interest rates to help ease liquidity problems at banks following the fallout from large swathes of people in the US defaulting on high risk sub-prime mortgages. Rye says that "central banks will intervene in the short term to prop up their local economies."

He says that although technology and retail are healthy sectors in the UK both can still expect to feel the pinch, at the same time banks will start to impose stronger criteria for private equity firms.

But what does this mean for IT disties in the channel? "Unfortunately distributors get squeezed at both ends," he concludes.

Derek Walton, the UK finance director at Magirus which recently sold the European IBM and HP arm of its business to rival distie Avnet, explains the firm has pan-European exposure across currencies. So, he says, any fluctuation in the yen, dollar or stirling "can suddenly weaken things."

However, he is quick to point out that although a weak dollar means purchase prices become cheaper there is not a huge impact on vendors as they usually work from fixed exchange rates.

Walton says he hasn't seen any hard evidence that disties will suffer but adds: "If it continues we could find some bigger players such as IBM and EMC being hit by the downturn... the markets are volatile but it's hard to predict what's going to happen."

Magirus has swerved any direct effect from the US credit crunch crisis as it is privately funded and thereby not answerable to shareholders and their concerns about market conditions. But Walton believes that banks have taken direct hits because they have made "lots of bad decisions". However, he thinks there is sufficient liquidity within the IT sector to keep the market ticking over with a relatively good outlook for disties in the UK.

"Right now, it's business as usual – in the long run we're talking about a financial rather than credit risk," he adds.

But, elsewhere there remains uncertainty about the credit crunch impact.In an S&P report ("The Leveraging Of America: Recent Leveraged Buyouts Drive Credit Risk Higher As The Market Churns") published earlier this month, analysts pondered over the impact of what could happen if market conditions tighten over a sustained period. It said:

"It looks like we may be near an inflection point in the credit cycle. The recent postponement of several major LBO (leveraged buyouts) financings is symptomatic of this changing credit landscape. The question is whether this is a just a pause in the market or a longer term market dynamic."

Echoing the ifs-and-buts mood regarding the impact of the volatile financial market on the UK IT channel, Dominic Connor, a director at P&D Quantitative Recruitment says, "no one knows when the waves are going to hit."

He believes that although disties will inevitably be stuck in the middle of any economic downturn the impact will likely be minimal because, importantly, there is "no great interest rate volatility in the UK."

Consumer spending in the US looks vulnerable, he explains, which could hit vendors because there is no boundary for them to draw the line. Connor reckons the biggest shock will be felt in the banking world, but "this is no train wreck", he says.

Talk of the credit crunch could take the "political heat" out of private equity firms which might be a good thing, he adds.

"Some disties could be hurt by this while some might be helped. I can't see banks calling in loans because the volumes of trading are not huge."

Connor concludes that the IT channel in the UK will weather the storm surrounding the current sub-prime and exchange rate crisis.

"It's like a battle going on next door. The odd refugee may wander across, but this is a civil war rather than empire building." ®

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