Wall Street Beat: Megamergers, Earnings Roil Tech
Against a backdrop of economic uncertainty, acquisitions and earnings news from the world's top PC makers (Hewlett-Packard, Dell and Lenovo), the biggest Internet business (Google), and a major handset maker (Motorola Mobility) marked major realignments in tech this week.
The M&A news highlights the dynamic nature of IT. Disappointing forecasts from Dell and HP, however, underscored sector weaknesses and gyrating share prices indicated once again that even cash-rich vendors are subject to economic concerns.
Google's announcement Monday that it would buy Motorola Mobility for US$12.5 billion in cash was credited with exciting investors and boosting stock exchanges after a wild week on the markets. But HP's news Thursday that it would acquire information-management software vendor Autonomy for $10.3 billion in cash and spin off or sell its PC business did little to break another gut-wrenching decline in the major exchanges.
Housing and unemployment data caused fresh anxiety Thursday. New claims for unemployment benefits increased by 9,000 last week, while sales of previously owned homes declined 3.5 percent in June. Meanwhile an unnamed European bank had to borrow money from the European Central Bank. The Dow cratered, dropping 419.63 points, or 3.68 percent, while the Nasdaq declined 131.05 points, or 5.22 percent, and the S&P slipped 53.24 points, or 4.46 percent. Tech stocks led the way down. Nasdaq computer stocks were down 5.19 percent and Nasdaq telecom stocks dipped 5.69 percent.
Exchanges seesawed Friday. Of the 25 most heavily traded Nasdaq companies, five were tech vendors whose shares slipped in late morning trading, including Microsoft, Intel, Apple, Qualcomm and Autodesk.
HP's move away from the PC market comes after several quarters of flagging PC sales, as worried consumers chose to spend limited budgets on smartphones and tablets rather than traditional personal computers.
"The economy has impacted consumer sales and the tablet effect is real" said HP CEO Leo Apotheker on a conference call Thursday. HP essentially admitted failure against Apple, announcing it would shut down its webOS business for tablets and smartphones, which it acquired just last year, when it bought Palm for $1.2 billion.
With the Autonomy purchase, HP is banking on enterprise software, which has been fueling profits for companies including Microsoft, Oracle and IBM.
HP's PC business is profitable, but offers slim margins and has been on a downtrend sales trend, dipping 3 percent year over year last quarter, HP said in its quarterly financial report Thursday. By spinning off its PC business, HP would lose its position as the world's biggest IT company. But it would raise gross margins and possibly attract investors, who are complaining about HP's sagging share price, which is at the same level it was 13 years ago.
HP's report for the July quarter met analyst expectations. Looking at the current quarter, though, HP forecast revenue to be between $32.1 billion and $32.5 billion, with earnings per share in the $1.12 to $1.16 range, excluding certain one-time charges. Analysts were expecting earnings of $1.31 on sales of $34 billion, according to Thomson Reuters. HP shares declined $1.88 to $29.51 before the market closed, sinking further in after-hours trading.
Google suffered a similar fate after it announced early Monday morning a deal to buy Motorola Mobility. Its shared ended the day down $6.54, at $557.23, and continued to slide throughout the week.
Google is fighting off a patent lawsuit brought by Oracle over the use of Java in Android. Google CEO Larry Page said the Motorola acquisition would give Android a boost, in part by helping Google build a patent portfolio to ward off further litigation. But industry insiders speculated that the move might cause handset manufacturers that use Android to fear Google as a competitor,, and possibly lead them to choose Windows Phone OS from Microsoft.
M&A activity in the IT sector is being fueled largely by trends including convergence, mobile proliferation, cloud security, virtualization and a consumer-driven market, according to PricewaterhouseCoopers analysts.
"The tech sector is defined by innovation," said Rob Fisher, U.S. technology industry leader at PwC. "Given the fundamental volatility associated with innovation and short product cycles, entire categories can rise and fall in a short amount of time, so technology companies tend to be have conservative capital structures, with certain cash reserves. Cash makes it more efficient to buy, versus build."
Earnings from Dell and Lenovo also highlighted ongoing trends:
--Dell Tuesday said it's profit for the quarter was up 63 percent year over year, to $890 million, but that revenue increased just 1 percent, to $15.7 billion. Dell is leaning toward higher-margin enterprise sales to drive profit. But large enterprises increased their spending on Dell by just 1 percent. Dell forecast sales in the current quarter to be flat sequentially, well under analyst expectations.
--Lenovo reported Thursday that for the quarter ended June 30, its profit nearly doubled year-over-year, to $108 million, while sales increased 15 percent, to $5.9 billion. The company has an established track record in the corporate market, having purchased IBM's PC business in 2005. The Lenovo report was an ironic twist: Many observers compared HP's decision to move away from PCs to IBM's move. But while HP appears to want to dump the low-margin PC business, Lenovo has done well with IBM's unit.
Continuing market volatility is likely to affect tech for some time to come. Though the basic drivers for tech acquisitions will not disappear anytime soon, continued share-price volatility and economic fears would likely dampen M&A over the next few quarters, PwC's Fisher said. Market volatility complicates valuations, and slowing economic growth tends to make vendors cautious about spending, he said.