Wall Street Beat: M&A, Oracle Stress the Positive
Some positive macroeconomic news, Oracle's plan to pay out a dividend, and mergers and acquisition news from Cisco, IBM and Sun this week stoked hopes for a sustained recovery in tech vendor shares even though companies like Palm, Nokia and Sony continue to brace for a poor sales outlook for the remainder of the year.
Though several exchanges declined Thursday, share prices have generally been on an upward swing since the tech-heavy Nasdaq hit a seven-year low on Monday, March 9. Federal Reserve plans, revealed Wednesday, to inject another US$1 trillion into the U.S. economy helped cheer investors, as did a report earlier in the week from the Commerce Department that showed that new-home construction increased in February, rather than falling to record lows as expected. In addition, the producer price index, a measurement of wholesale prices, increased 0.1 percent in February, after a 0.4 percent increase in January.
Whether the positive news will fuel confidence in the economy remains to be seen, but IT investors seemed to take a positive view of events this week. Oracle third-quarter financial results, for example, were fairly flat, but investors cheered better-than-expected earnings per share. Oracle said Wednesday that its net income for the quarter dropped 1 percent to $1.3 billion, but excluding one-time items, its earnings per share of $0.35 beat the $0.32 forecast by analysts polled by Thomson-Reuters. That, and Oracle's declaration that it would pay out a dividend -- keeping up with other major IT vendors -- made investors happy. Oracle shares closed at $17.37 Thursday, up by $1.34.
News on the merger and acquisition front this week also stoked investor excitement. Though M&A can be a sign of consolidation in a down market, it also means that buyers and sellers are confident that they can put a fair value on deals -- a tough exercise in a volatile or down market.
Cisco's announcement Thursday that it will buy Pure Digital Technologies, maker of the Flip video camcorder, for $590 million in stock, could be a harbinger of the types of deals that may come down this year, and a general upswing in M&A activity.
M&A in 2008 declined about 40 percent from 2007 in dollar terms as the turbulent market made it difficult to find financing or to evaluate the true worth of IT vendors. However, IT industry insiders expect deals to be signed this year as bargain hunters go shopping and use acquisitions to boost revenue in a slow market.
"Corporate buyers do plan to ink deals in 2009," according to a report by 451 Group this year. "Half of the respondents said the M&A climate would get 'somewhat better' for them in 2009, with another one-quarter saying it would get 'significantly better,' " the report said.
M&A will not see "transformative" types of deals this year, but rather "bolt-on" deals that help vendors in specific market niches, the report said.
This seems to be the type of deal that Cisco struck this week, as the Pure acquisition can help it specifically in the home media user category.
IBM's acquisition talks with Sun Microsystems, first reported by the Wall Street Journal, are about a much more complex and costly deal, for $6.5 billion. The acquisition would help IBM make inroads into Sun's loyal base in areas such as the financial community. It would also add Sun's extensive software intellectual-property portfolio to IBM offerings.
Microsoft CEO Steve Ballmer, speaking in New York Thursday, said he relished such a combination, which he said would take IBM a year or two to digest. Meanwhile, Microsoft is ready to do a series of smaller deals -- "10,15 or 20" -- of under $500 million, Ballmer said. He noted that Microsoft would still be interested in doing a search deal with Yahoo, but that Yahoo's new CEO, Carol Bartz, needs to settle in before they can talk about whether any sort of linkup might still be possible.
Despite the excitement around M&A this week, Nokia, Sony and Palm announcements brought up sobering news that the year will remain difficult for IT vendors as businesses and consumers continue to rein in spending. Nokia said Tuesday it will cut its staff by 1,700 globally as it deals with declining phone sales. Nokia initially said it would make staff cuts in January, when reporting its fourth-quarter sales that were down about 19 percent year-on-year.
Hit by competition from Apple and BlackBerry maker Research In Motion, Palm Thursday said its loss grew to $98 million for the third quarter, from a loss of $57 million a year earlier.
For its part, Sony said Thursday it will enact a salary freeze on full-time workers in Japan for one year to cut costs, as it expects a huge loss due to the global downturn.
The big question now is whether the IT market hit bottom last week. For a sustained rally to occur, IT investors likely will need to hear more solid good news. Comprehensive government plans to address systemic risk would help. This past weekend, officials from the G20 nations -- the world's most developed economies -- met in advance of a more general meeting in the U.K. in April, but no broad agreement on a coordinated stimulus plan was reached.