Wall Street Beat: Tech Leads Market Optimism

Optimism about IT helped boost stock exchanges to 2009 highs this week as tech-sector mergers and acquisitions and news about improving demand for hardware buoyed investor confidence.

The tech-heavy Nasdaq Composite index hit 2133 on Wednesday, its highest level for 2009, well above the 1630 mark at the start of the year and its low of 1268.64 on March 9. Nasdaq computer stocks were up 50 percent for the year, while Nasdaq telecom stocks were up 48 percent for the year. The broader Dow Jones Composite Index was up 10 percent for 2009.

M&A activity has fueled investor excitement about the tech sector. While the recession has killed the market for leveraged buyouts and private equity deals this year, there has been a steady stream of acquisitions among tech companies, many of which have large coffers of cash.

In one of the larger tech deals announced recently, Adobe said late Tuesday it will acquire Web analytics company Omniture for US$1.8 billion in cash. Adobe said it will incorporate Omniture technology into its own Web-development and document-creation products. Adobe is paying a 45 percent premium over Omniture's share price, which may account for the immediate reaction to the deal: Adobe shares slipped by $2.27 to close at $33.35 Wednesday.

However, M&A often stokes investor excitement because it is seen as a sign of industry confidence in certain technologies. Vendors will buy companies in order to quickly ramp up in areas of technology that they believe are taking off.

For example, Intuit -- the leading personal finance software developer -- on Monday announced it would pay $170 million for startup Mint.com. Though Intuit has successfully battled Microsoft Money for years, the company has not had a response to various Web-based financial tools that have sprung up lately. Mint offers free tools to help consumers gather and analyze personal financial information. While Intuit shares dipped by $0.07 to close at $27.78 Tuesday, they bounced back up to $27.89 Wednesday.

The M&A market has been hot internationally as well. On Wednesday, Japanese chip makers NEC Electronics and Renesas Technology announced they planned to merge by May next year. The new company, Renesas Electronics Corp., will have a leading market share in microcontrollers and system-on-chip (SoC) products and will be the third-largest chip maker globally in terms of revenue.

The NEC Electronics-Renesas merger, unlike the Adobe and Intuit acquisitions, can be seen as a sign of weakness, rather than strength, since both companies lost money during their last fiscal year, ended March 31, and officials said merger talks were sparked by tough market competition. Nevertheless, there are signs that the hardware market is picking up.

On Wednesday, IDC issued revised second-quarter PC shipment figures that were better than prior estimates. Worldwide PC shipments fell 2.4 percent year on year in the second quarter of 2009, IDC said. Two months ago, IDC had estimated the drop to be 3.1 percent, and earlier this year the market research company had projected a 6.3 percent drop. User interest in portable computers, including both netbooks and laptops, has helped cushion the effects of the recession, though sales of cheaper machines have had an effect on revenue -- shipment value was down 19.1 percent in the second quarter compared with the year-earlier period.

But as demand picks up, revenue should also increase over the next few quarters, IDC said.

"Going forward, the market should stabilize a bit for both units and value," IDC said in its Quarterly PC Tracker. "Desktop volume will be roughly flat in 2010, while portable PC growth of 16.5 percent in 2010 will drive overall volume gains."

News from tech companies was not completely upbeat this week. For example, Palm Thursday posted a loss for its fiscal first quarter as revenue dropped, though the company beat analyst expectations. For the period ended Aug. 28, the company had a loss of $164.5 million, or $1.17 per share, compared with a loss of $41.9 million in the same period a year earlier.

Excluding one-time charges, Palm posted a loss of $13.6 million, or $0.10 per share, much better than the loss of $0.24 per share forecast by analysts polled by Thomson Reuters. The company did not break out sales of its latest Pre smartphone, but some analysts have said that shipments have not been as high as expected.

The news from Oracle, a major software bellwether, was also mixed. The company said Wednesday that its first-quarter net income rose by 4 percent year-over-year to US$1.1 billion, but that sales dropped by 5 percent to $5.1 billion.

Though the company's upgrade and maintenance business remains strong, new software license sales fell 17 percent to $1 billion, a sign that corporate users remain hesitant to make major software investments.

After hitting highs for the year Wednesday, exchanges dipped a bit Thursday. Since exchanges hit daily increases for eight out of the nine trading sessions leading up to Wednesday's close, many analysts consider Thursday's a temporary pause, as investors sold shares to rake in profits generated from the recent stock surge.

How tech-company share prices fare for the rest of the year will depend to a large degree on third-quarter financial reports, due out next month.

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