Good news about the U.S. economy gave a boost to the tech sector this week, but mergers and acquisitions news including Verizon Wireless‘ US$28 billion acquisition of Alltel also helped pique IT investor interest.
With its Alltel buy, Verizon leapfrogs AT&T into first place in the U.S. mobile market. Verizon said the acquisition will give users access to an expanded range of products and services. But essentially, Verizon is buying its way to a bigger customer base. As more people acquire mobile phones, it gets harder for service providers to find new customers without getting them to switch from other providers.
For this reason, M&A in the mobile market is probably far from over.
“We have already seen several big mergers in the wireless industry in recent years. Then it cooled down. That means there are fewer companies left to acquire, but even with that said I don’t think we are done yet,” said telecom analyst Jeff Kagan in e-mail. “Alltel is part of the Tier 2 category and there are several other companies in that space that could also be part of this next wave of acquisitions.”
Traders boosted Verizon shares on the news. Company shares closed Thursday at $38.96, up by $1.98. Big M&A deals usually boost investor confidence in a sector. If a company is willing to spend a lot of cash on an acquisition, it usually means it has faith that future growth will make the deal worthwhile. However, big acquisitions usually dilute earnings for a while. For this reason, shares of acquiring companies often drop on the announcement of a big deal. This makes Verizon’s share price jump Thursday all the more impressive.
The logic behind the Alltel buy is essentially the same reasoning driving France Télécom’s bid for Swedish telecommunications operator TeliaSonera. In a competitive, saturated market, big companies grow by acquisition. And if anything, the mobile market in Europe is more saturated than in the U.S. TeliaSonera Thursday announced it rejected France Télécom’s offer of about 252 billion Swedish kronor (US$41.8 billion) as too low. But negotiations have been friendly, and a deal is expected to happen over the next few weeks.
EMC‘s $213 million cash acquisition of storage vendor Iomega looks like it is finally set to close. The tender offer had to be extended to Friday in order to give the European Union time to consider and approve the deal. The enterprise storage market — EMC’s strength — is thriving, but the Iomega acquisition was a way to get a quick foothold in the fast-growing consumer and small business markets. EMC shares hit a yearly low of $14.17 on April 15, shortly after it announced the Iomega buy, but have gained ground since then. Shares rose $0.04 Thursday to close at $17.44.
In other M&A news, hosted ERP (enterprise resource planning) vendor NetSuite said Monday it would buy OpenAir, a maker of Web-based PPO (project portfolio management) and PSA (professional services automation) software, for $26 million. The drivers for M&A in the Web-based, on-demand world are quite different than in more mature markets such as wireless. In the realm of hosted services, acquisitions are all about being able to offer hot new technology ahead of the competition, in order to attract users who are getting into a burgeoning market.
NetSuite shares drifted upward this week, closing Thursday at $17.44, up by $0.04.
News about better-than-expected retail sales last month and a government report on a decline in laid-off workers seeking unemployment benefits during the last week of May helped inject confidence in the U.S. economy, lifting most business sectors, including technology. The Nasdaq Composite Index hit 2549 Thursday, its highest point since January.