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Wall Street Beat: M&A, HP and Dell Results Roil Market

With billion-dollar-plus acquisitions involving Intel, McAfee, Dell and 3Par, quarterly results from vendors including Hewlett-Packard and Dell, as well as various PC and jobs market reports, IT observers had a lot to digest this week -- not all of it good.

While mergers and acquisition activity and strong sales reports usually excite investor confidence, a pall of economic uncertainty continues to linger over the tech market. On the tech-heavy Nasdaq, computer stocks on Thursday closed down by 4.81 percent for the year and telecommunications stocks closed down by 5.56 percent. On the broader New York Stock Exchange, the tech/media/telecom category closed down by 2.69 percent.

Above all else, investors appear to fear that an economic slowdown will have an impact on IT spending. Government reports Thursday showed that first-time claims for jobless benefits increased to a nine-month high of 500,000 last week, and factory activity in the mid-Atlantic states has started to decline this month, for the first time in about a year.

Despite the clouds over the broad economic landscape, IT vendors continue to report solid growth over last year's recession-slammed results.

Hewlett-Packard Thursday announced that in the three-month period ending July 31, net revenue increased by 11.4 percent from the year-earlier period to US$30.7 billion, while net earnings increased 6 percent to $1.8 billion.

The results were expected, since the company pre-announced its financial statement two weeks ago when CEO and Chairman Mark Hurd resigned, following an investigation into claims that he sexually harassed a former contractor to the company. The inquiry found that Hurd did not violate HP's sexual harassment policy but that he did violate its standards of business conduct.

Since that announcement, media reports citing company insiders have said that many HP executives were upset with Hurd's cost-cutting practices -- fearing that they would cripple the company's vaunted R&D -- and used the sexual harassment case as a way to force him out. HP's share price has hit 52-week lows recently, and all eyes are on the company for signs of weakness as it scrambles to find a new chief executive.

Dell, also reporting quarterly results Thursday, said for the quarter ending in July, revenue increased 22 percent from the year-earlier period, to $15.53 billion, while net income rose 16 percent to $545 million, amounting to earnings per share (EPS) of $0.32, excluding one-time charges. The results beat expectations of analysts polled by Thomson Reuters, who forecast revenue of $15.21 billion and EPS of $0.30.

The good news comes at an opportune time for Dell. About 25.2 percent of shareholders last week withheld support for CEO and Chairman Michael Dell's re-election to the company's board, in the wake of a Securities and Exchange Commission (SEC) complaint last month that charged Dell and other company officials with misreporting more than $1 billion of payments from Intel to boycott AMD chips. The SEC also charged Dell and other officials with a litany of other accounting violations revolving around the use of "cookie jar" funds to make up for sales shortfalls during the 2002-2005 period.

Confidence in Dell can only continue if the company continues to broaden its portfolio in an effort to move into new markets. One big sign that the company is doing so is its $1.15 billion planned acquisition of data storage company 3Par, announced Tuesday.

IDC had some good news Thursday, reporting that global PC microprocessor unit shipments and revenue in the quarter increased 3.6 percent and 6.2 percent, respectively, compared to the first quarter. This is better than the usual change from the first to the second quarter of the year, since the average change in shipments is an increase of 1.6 percent, and revenue usually decreases 2.8 percent, IDC said.

However, early signs indicate that demand is weakening in August.

"Major OEMs cut PC build orders with their contract manufacturers who, in turn, have cut orders for commodity components," said Shane Rau in the IDC report. "While the PC processor vendors re-iterated their solid outlook during their most recent earnings calls, the softness we've seen ultimately makes us concerned for end demand's pull on processors." The second half of the year will likely see a slowdown in growth, Rau said, adding, "2011 remains a wildcard in terms of sustainable unit growth."

Meanwhile, chip giant Intel's surprise announcement Thursday that it would buy security software vendor McAfee for $7.68 billion was seen by many observers as a way to branch out from the saturated PC market to the high-growth mobile market. "With the rapid expansion of growth across a vast array of Internet-connected devices, more and more of the elements of our lives have moved online," said Intel CEO Paul Otellini in a statement before the market opened Thursday.

Intel gave only broad hints at how McAfee's technology will fit into its product line, and it still may need to convince investors that the deal makes sense. Its share price dropped by $0.69 to $18.90 by the end of the day.

Other vendors this week reported positive financial news:

--Data storage company NetApp said Wednesday that revenue for the quarter ending in July increased to $1.14 billion from $838 million a year earlier, while profit increased to $142 million from $52 million.

--Lenovo Group said Thursday that sales for the quarter ending in June were up 50 percent over the same period last year, to $5.1 billion, while profit jumped to $55 million, compared to a loss of $16 million last year. Sales in China and emerging markets fueled the growth, Lenovo said.

While businesses and consumers are clearly spending more on IT than they were last year, it's just as clear -- judging from turmoil on the markets -- that investors haven't yet bought into the idea of a stable economic recovery.

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