SuMMer 2011 www.bdo.coMThe NeWSleTTeR Of The BDO TeChNOlOgy & lIfe SCIeNCeS pRACTICe did you know... According to The 2011 BDO 600 Survey of Board Compensation Practices of 600 Mid-Market Public Companies, board directors in the tech sector are the most highly compensated compared to other industries. Forty-two percent of organizations said their IT department reports to the CFO, according to a study by Gartner. According to Dealogic, dealmakersdeSpite record revenueS, announced 851 transactions with U.S. technology companies as the target, together valued at $54.7B, during theriSkS LooM in the first five months of 2011.SeMiconductor induStry IDC reports that over 70% of tech leaders expect at least 30% of all IT departments will offer cloud servicesBy Slade Fester and Bryan Gendron to partners and customers by 2014.S Seventy-four percent of investment ales are surging in the semiconductor u MergerS and bankers predict more tech IPOs during sector. Worldwide sales for 2010 reached a record high of $298.3 billion, acquiSitionS continue to the second half of 2011, according toa 31.8 percent increase from the $226.3 doMinate the Sector the 2011 BDO IPO Halftime Report.billion reported in 2009, according to the In today’s market, deals are getting larger PC shipments are expected to growSemiconductor Industry Association. This and any company can be an acquisition 9.3% in 2011, reaching 385 millionmarks a historic milestone for the industry, target. Rising pressure to sustain revenue units, according to Gartner.particularly in light of the severe global growth and diversify products has led tomacroeconomic downturn experienced in some of the biggest deals we’ve seen this2008 and 2009. Opportunities are abundant year – Applied Materials purchased Varianin this charged environment; however, today’s Semi Conductor for $4.9 billion and Texasdynamic marketplace has made even the Instruments acquired National Semiconductormost common and consistent risks more for $6.5 billion. As a result, the playing fieldthreatening than ever. In order to successfully is shrinking in the analog subsector andnavigate the terrain separating corporate other semiconductor businesses. With moresuccess and failure, companies need to complicated applications, and an increasedrecognize, manage and react to risks in a focus on solutions as opposed to productstimely manner. or components, companies are finding niche u Read more
2 BDO TECHu ontinued criSkS LooM in the SeMiconductor induStryareas to grow their businesses. This makessemiconductor companies prime targetsfor organizations looking for solid revenuegrowth and synergistic opportunities. Wesaw this trend in our 2011 RiskFactor Reportfor Technology Businesses, which found thatM&A activity, as well as competition andconsolidation, are among the top 10 riskscited by tech companies. Whether companiesare striving for increased market share in aparticular geography, compatible technology,design center, manufacturing capacityor otherwise, we expect the appetite fordeal-making in the semiconductor space tocontinue. semiconductor assemblies have substantially Concerns over data security breaches inu SuppLy chain increased in a short period of time, making the global market are also growing. forManageMent iS criticaL to this cost difficult to pass on to customers. The semiconductor companies, data theft can beSurvivaL price of copper, in particular, has hit record far-reaching and can consist of something asThe production of raw materials and the highs in recent months and is almost double simple as the unwanted interception of a chipability to obtain them at favorable prices is the average price from only two years ago. design emailed to a contract manufacturer.another key component to corporate success This trend is expected to continue through Additionally, if the chip were to be used forin the hardware industry. This can present at least the end of the year due to shrinking a U.S. government project, the ramificationschallenges in a volatile market as wafer copper production and stockpiles, and if of a theft or data breach is that much moreproduction is controlled by a relatively small copper prices do stabilize, they are estimated significant. To mitigate these risks, companiesgroup of large contract manufacturers located to level off at these higher prices. Companies must focus on robust regulatory and legalprimarily in Asia. According to the RiskFactor that were able to negotiate long-term, compliance programs and tighten controlsReport, companies are feeling this pressure cost-effective contracts for precious metals, over distributor agreements.more than ever. The availability and pricing of through hedging or other means, are far aheadraw materials is a risk cited by 34 percent of of their competitors. u what’S next?companies surveyed, 79 percent more thanin 2010 (19%). global supply chain issues Recent analyst reports from gartner suggest u the worLd iS getting that companies might be scaling back theirare also noted by a vast majority (86%) ofcompanies. The earthquake and tsunami in SMaLLer – iS your inventory in light of heightened uncertainty onJapan in March 2011 further strained the technoLogy Secure? end-demand forecasts into the second half of 2011 and reports that supply chain managerssupply chain, with some companies impacted Risks associated with international operations are adopting more cautious practices.directly and others feeling the effects despite are on the rise as companies’ touch points Additionally, some believe that the Japanbeing several steps removed. become increasingly global. Inconsistent earthquake and related anxiety over product and often unenforced trade restrictions withIn order to mitigate supply chain risks, some allocation has caused an acceleration of orders certain foreign countries have put productssemiconductor companies maintain their own into March and April leading to unsustainable and intellectual property at risk. Companiesfabrication facilities, but these operations are booking levels. Still, gartner projects a 5.1 are also threatened by unfavorable foreignoften not large enough to supply 100 percent percent growth for the sector in 2011. currency fluctuation, as well as environmentalof the company’s raw material needs. Still, and regulatory compliance risk. The use of While we do not have a crystal ball to show ustoo much capacity in a down market can be distributors to sell products internationally what the future holds for the semiconductorworse than not producing enough product to increases regulatory risks, as products may be industry, one thing is clear: companies thatmeet demand, particularly since the expenses sold in countries subject to trade restrictions, recognize the potential risks to their businessassociated with extra capacity can take a leaving the manufacturer, not the distributor, and are prepared to react quickly are besttoll on the bottom line. In addition, wafer ultimately responsible for this regulatory [and positioned for success.fabrication operates in an oligopolistic market, potential Ip] infraction. At the same time,making it difficult for companies to get quality, the global economy has demanded a largerhigh-yield products at favorable pricing. for international presence earlier in a company’sthose who have their own fabrication facilities, life cycle, which intensifies the risk. Slade Fester is a partner and Bryan Gendron is a senior manager in the Technology & Life Sciencesthe availability and pricing of the conductive practice.materials used in the wafer fabrication and
BDO TECH 3the tech induStry’S next big threat: Foreign corrupt practiceS act development especially in foreign locales. Third, technology companies, particularly those in new sectors, need to grow quickly to be competitive. This growth creates compliance challenges as companies hire new employees and engage additional third-party representatives. To avoid being swept up in this wave of increased enforcement in the U.S., technology companies must implement a robust anti- corruption compliance program, which should include, among other things: • A corruption risk assessment • A code of conduct • A strong, explicit and visible commitmentBy Glenn Pomerantz, CPA, CFE and Brian J. Mich, JD, CAMS, BDO Consulting to eradicating corruption from seniori management n the last several years, both the U.S. designed to prevent instances of corruption. • Anti-corruption policies and procedures Department of Justice (DOJ) and the An important aspect of the law, and one that tailored to the company’s specific corruption Securities and exchange Commission is of particular concern for corporations and risks(SeC) have focused their U.S. foreign Corrupt their management, is that a company does • Internal controls, including an automatedpractices Act (fCpA) enforcement efforts not have to be directly involved in a bribe process of continuous controls monitoring,on specific industries, such as oil and gas, payment to be liable under the statute; rather, reasonably designed to ensure thepharmaceutical, defense products and it can be held liable if management knew or maintenance of fair and accurate books,financial services. events during the first half had reason to know that a third-party acting records and accounts to ensure that theyof this year provide strong reason to believe on the company’s behalf was offering or cannot be used for the purpose of foreignthat technology companies are now the focus making improper payments. bribery or concealing such briberyof these heightened enforcement efforts: In • Due diligence procedures focused onApril 2011, IBM, Maxwell Technologies and The DOJ and SeC, which, respectively, have corruption risks when hiring third-partyComverse Technology, Inc. all entered into criminal and civil enforcement jurisdiction representatives or evaluating a merger oragreements to resolve fCpA charges in which under the fCpA, have brought an increased acquisitionthey agreed to multimillion dollar financial number of enforcement actions against • A mechanism for employees topenalties. In addition, both hewlett-packard both corporations and individuals over the anonymously report violations of theand Veraz Networks Inc. have disclosed in past ten years. These efforts have resulted company’s anti-corruption policies orpublic filings that they are the subjects of in substantial jail sentences and fines applicable anti-corruption lawsfCpA investigations. imposed upon guilty individuals, as well as • Thorough investigation of allegations of heavy monetary penalties, costly internal corruption and discipline of those found toThese increased enforcement efforts make investigations, and debarment for companies have violated company policy or applicablecompliance with the fCpA and other anti- in violation. anti-corruption lawscorruption laws around the globe one of • periodic testing and monitoring of thethe biggest challenges facing multinational The technology industry is especially compliance program’s effectiveness,technology companies today. The fCpA susceptible to fCpA risks for several reasons. including substantive testing of transactionscontains two provisions: (1) an anti-bribery first, because technology companies are • A process of periodic assessment andprovision, which prohibits paying, offering subject to a great deal of regulation and revision, as needed, of the company’s anti-or promising anything of value to a foreign often sell their products to governments or corruption policies and procedures.official in order to obtain or retain business; state-owned entities, they commonly interactand (2) a “books and records” provision which with foreign officials. Second, technology Glenn Pomerantz is a partner and Brian Mich is arequires a company listed on a U.S. exchange companies often rely upon third-party managing director in the New York office of BDOto maintain accurate books and records and representatives, such as agents, consultants, Consulting. They lead the firm’s Anti-Corruptionto implement a system of internal controls distributors and resellers for business Compliance & Investigations practice.