Wall Street Beat: Hardware, IT M&A in Spotlight

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With vendors maneuvering for an edge in a down market, the tech mergers-and-acquisitions arena is staying hot this week while the hardware sector comes under scrutiny as server and chip sales founder.

Turbulent credit markets have prevented private capital from being a big factor in IT M&A this year, but some cash-rich tech companies are tapping their coffers to make acquisitions and broaden their market share or product portfolios. For example, storage giant EMC Wednesday said it would acquire ConfigureSoft, which makes server configuration, change and compliance management software. EMC said the deal, for an undisclosed sum, would expand its management offerings.

Also on Wednesday, virtualization software maker VMware said it invested US$20 million in cloud computing partner Terremark. Terremark uses VMware software to offer an enterprise cloud platform that lets users buy processing power, memory and storage.

On Tuesday, Facebook said it had sold a 1.96 percent equity stake in the company to Russia- and U.K.-based investment firm Digital Sky Technologies for $200 million. That gives Facebook a $10 billion valuation,

a third less than what it was valued at when it sold a 1.6 percent stake for $240 million to Microsoft in 2007. Though Facebook officials insisted the company is not strapped for cash, it said the money would

"facilitate liquidity" for employee share options.

Observers were skeptical of the company's insistence that it did not need the cash. Though Facebook has seen phenomenal user growth, it has been having difficulty monetizing its success in the social-networking sphere and has to spend cash on research and development as it faces a variety of rivals.

One of the big tech financial stories of the week was not about a merger, however, but about a decoupling: Time Warner announced Thursday that it would spin off its AOL unit by the end of the year, subject to regulatory and board approvals. For years, AOL has tried to shift to an online ad business model, away from its legacy as a dial-up Internet service provider. However, it has failed to keep up with average industry growth.

The situation is a far cry from 2000 when AOL and Time Warner said their merger would create the "first fully integrated media and communications company for the Internet Century."

Meanwhile, hardware sector news did little to suggest that relief is on the way for computer makers. IDC issued a report Wednesday showing that server sales dropped globally by 26.5 percent in the first quarter from last year, to around 1.49 million units. Factory server revenue was down 24.5 percent to $9.9 billion in the first quarter, IDC said.

Gartner forecast semiconductor revenue for 2009 at $198 billion, a 22.4 percent decline from 2008 revenue of $255 billion. The estimate is slightly better than the first-quarter projections, when Gartner forecast chip revenue to decline 24.1 percent in 2009.

"First-quarter PC shipments came in better than expected, which led to an improved outlook for microprocessors, but we believe most of this improvement was due to the fact that inventories had been run down too far, rather than true demand returning," said Bryan Lewis, research vice president at Gartner, in the report.

In its quarterly report Thursday, Dell stayed optimistic about the end of the recession.

"We're preparing for what we believe will be a powerful replacement cycle, with virtualization and managed services playing larger roles in what customers want and Dell provides," CEO Michael Dell said in a release.

Dell earnings per share, excluding one-time items, came to $0.24, or $0.01 better than the forecast of analysts polled by Thomson Reuters. But sales for the quarter ended May 1 were $12.3 billion, down 23 percent from the $16.1 billion level a year ago. That sales figure, along with the reports of a continuing downturn in chip and server revenue, suggests the computer industry has a way to go before it is out of the recessionary woods.

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