Wall Street Beat: M&A, Chips and Online News Ease IT Worries
— -- Mergers and acquisitions involving tech bellwethers like Microsoft, Yahoo, AOL and EMC, as well as upbeat reports on the online and chip sectors, helped take the edge off IT investors' nerves this week as they await a flood of earnings reports.
Corporate profits for the first quarter in general are expected to reflect the downturn in the U.S. Analysts polled by Thomson Financial forecast earnings for companies in the broad S&P 500 index to drop 12 percent. But tech sector companies have recently issued conflicting and cautiously worded forecasts, leading to some confusion about what to expect.
For example, Advanced Micro Devices on Monday said it plans to lay off 10 percent of its work force in the next six months to cut costs. It also lowered its revenue expectations for the first quarter due to lower-than-expected sales, predicting US$1.5 billion in turnover. Analysts polled by Thomson Financial were forecasting revenue of $1.61 billion.
But the bad news seems to be confined to AMD. Many analysts, cheered by reports of higher-than-expected March semiconductor sales around the world, believe that chip inventories are being drawn down, which would buoy the sector. AMD woes, stemming in part from the botched launch of its "Barcelona" quad-core chips, may be its own problem, and the company's loss may be Intel's gain.
Banc of America Securities, citing a chip inventory drawdown, upgraded its rating on the U.S. chip sector. The move fueled gains of shares on major U.S. stock indexes on Thursday. Intel shares rose by $0.66 Thursday to close at $22.08.
M&A news excited investors this week as well. M&A can be seen as a depressing trend in moribund markets. But despite the overall economic downturn, most tech sectors are still seen as dynamic, and most IT investors view M&A as a way for companies to quickly gain share and absorb new technology in growing and competitive markets.
M&A activity was down during the first quarter compared to last year, slumping to $92 billion in total value from $100 billion, according to The 451 Group. But most of the decline was due to a drop in acquisitions from leveraged buyout groups (a result of turmoil in financial markets). The decline in acquisition spending by tech companies themselves, which have plenty of cash after years of booming sales, declined only 3 percent.
One of the big-ticket acquisitions this week is EMC's $213 million cash acquisition of storage vendor Iomega, to tap the consumer and small-business markets. But the big M&A news has been the continuing saga of Microsoft's bid for Yahoo. Yahoo is now talking to Time Warner about combining Internet operations with AOL, while Microsoft is talking to News Corp. about a joint bid for Yahoo, according to media reports.
The interest in Yahoo has done wonders for its share price, which jumped by $0.82 to close at $28.59 Thursday, well above the $19 range it was trading in during January, before Microsoft announced its intentions.
No matter how the story ends, and despite the logistical problems that any merger would entail, many industry insiders are betting that any Yahoo deal will enrich investors and, ultimately, the company that ends up buying it. For example, Capital World Investors, the biggest institutional investor in Yahoo, has practically doubled its investments in the company recently, according to a filing with the SEC.
Yahoo itself is on the march, announcing on Wednesday a deal to purchase assets of Tensa Kft, for Web analytics business, for an undisclosed sum.
Share values of online companies have fared poorly this year. Amazon is down 20 percent, Expedia is down 24 percent and Google is down 33 percent, according to Citigroup Global Markets Equity Research. But some traders are banking on the fact that share prices have been discounted to the point where they have adequately accounted for any slowdown, and may be poised to bounce back on signs of an upturn. A glimmer of good news shone on the sector this week when Shop.org announced a study conducted by Forrester that forecast online retail sales to hit $204 billion in 2008, up from $175 billion in 2007.
The tech-heavy Nasdaq Composite Index, after its worst quarter since 2002, has trended higher since the start of the month. Whether that will last depends on earnings reports over the next few weeks, starting next week with Google, IBM, Yahoo and AMD.