Wall Street Beat: Deals, Earnings Rock IT

Acquisitions, partnerships and earnings from some of the biggest names in technology roiled the markets this week, but the main message investors seem to be sending is one of growing confidence that the IT sector will make a decent comeback in the last part of the year.

Last week the tech-heavy Nasdaq hit its longest winning streak -- 12 straight days of gains -- since 1992. Though the markets were turbulent this week, on Thursday the Nasdaq and other major indexes hit their peaks for the year, and it's clear tech is leading the overall market comeback of the past few months.

Shares of computer and telecom companies on the Nasdaq are up about 41 percent for the year. The overall Nasdaq Composite Index rose 24 percent for the year. In contrast, the broad-based Dow Jones Composite Index of large companies is up 3 percent for the year and the Standard and Poor's 100 index is up 7 percent for the year.

Acquisitions and partnerships provided the most excitement in tech this week. Vendors often make acquisitions or partnership deals to ramp up quickly in a hot technology area they may be weak in. As such, an acquisition or partnership can be a sign of vendor confidence in a product or technology sector.

The deal between Microsoft and Yahoo generated the most headlines this week. The revenue-sharing agreement calls for Microsoft's Bing to run Yahoo's search site and for Yahoo to sell premium search advertising services for both companies, while the self-service ads will be powered by Microsoft's AdCenter. It was a long road to the deal from Feb. 1 last year, when Microsoft offered to buy the whole of Yahoo for US$31 per share, or about $44.6 billion.

The deal will not be fully implemented for two years, and first, the companies need the approval of regulators. Meanwhile,

the pace of change on the Internet is not diminishing.

"In many ways both companies, especially Yahoo, would have been better served if a deal had been concluded substantially earlier," said David Mitchell, research fellow at Ovum, in a research note.

For Yahoo, the fact remains that with its share price at the $15 level, the company is worth less than half of what Microsoft offered 18 months ago, and it will be years before anyone can measure the full impact of the just-announced deal. For Microsoft, if nothing else, it's a huge win for its new Bing search technology. Investors apparently saw it this way. Microsoft shares gained $0.33 to close at $23.80 Wednesday, the day of the announcement, while Yahoo shares dropped by $2.08 to close at $15.44.

Statistics software developer SPSS fared better after its deal to be acquired by IBM for $1.2 billion in cash was announced Tuesday. SPSS' share price jumped by $4.36 to close at $49.45 at the end of the day. IBM has been making a big push in business analytics. Last year it bought Cognos for $5 billion.

The telecom and network equipment markets saw a number of deals this week. Sprint Nextel and Virgin Mobile USA on Tuesday said they reached an agreement for Sprint to acquire Virgin Mobile for $483 million. Sprint said it will expand its position in the prepaid mobile-phone business by incorporating Virgin Mobile into Sprint's Boost Mobile business. Investors applauded the move. Virgin shares rose by $0.07 to close at $5.28 and Sprint Nextel shares rose by $0.04 to close at $4.59.

One of the biggest deals of the past week was in the market for carrier equipment, as LM Ericsson won the bidding war over the wireless assets of Nortel Networks, agreeing to pay $1.13 billion for the financially beleaguered Canadian company's CDMA (Code Division Multiple Access) business and LTE (Long-Term Evolution) Access technology. Ericsson's shares slipped $0.27 to $9.38 Monday after the deal was announced, perhaps because the price tag was considered high, compared to Nokia-Siemens' $650 million bid.

Among the many second-quarter earnings reports this week, SAP and Motorola on Thursday provided an extra boost for optimism. SAP reported a 4 percent year-on-year increase in net income, to €423 million (US$602 million), even as revenue dropped 10 percent.

"I am cautiously optimistic that the worst might be behind us," said CEO Léo Apotheker, speaking to analysts on a conference call.

Motorola posted a profit of $26 million, compared with a profit of $4 million last year. Even though the profit was mainly due to special accounting items, Motorola shares rose $0.62 to $7.19 in after-hours trading Thursday and stayed at that level Friday even though shares of many other major companies slipped in a turbulent trading day. That was because the company did better than expected: It shipped 14.8 million phones, higher than the average forecast of 14.1 million from analysts polled by Thomson Reuters.

So far, the markets have been gaining at least in part because tech companies have done better than expected during the recession.

It remains to be seen whether vendors can continue to impress as the recession eases.

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