Wall Street Beat: Uncertainty rules '08 outlook

In the last full trading week of the year, the NetSuite IPO, acquisition news and earnings reports from Oracle, Palm and RIM highlighted technology sector gains, but also concerns for 2008.
Oracle on Wednesday reported net income of US$1.3 billion for the quarter ending Nov. 30, up 35 percent from a year earlier. The report validated its acquisition strategy at the end of what is bound to be a record year for M&A in the tech sector. Oracle's results show it is leveraging homegrown as well as acquired products, cross-selling a broad variety of business applications. Company shares closed Thursday at $22.10, up by $1.34.

The U.S. Federal Trade Commission's approval on Thursday of Google's acquisition of online ad-server DoubleClick helped boost Google shares by $12.32, to close at $689.69, even though the deal requires other government body approvals.

Through November 2007, tech M&A amounted to about $449 billion, close to the total for 2006, according to a report released this week by the 451 Group. With a strong December for M&A, 2007 "could be the first year in tech M&A history to top a half-trillion dollars' worth of transactions," according to the report.

There are a variety of reasons for the banner M&A year, but underlying them all were strong vendor earnings. Next year, though, will likely see a slowdown in deals.

The U.S. housing slump and resulting turmoil in financial markets have raised fears of an overall slowdown in the economy. This could affect consumer and business buying plans as well as the financial results of tech vendors.

"There's a sense of muted expectation," according to the 451 Group's Brenan Daly. "Corporate buying activity reflects to some degree consumer activity. If you are flush with cash and expecting good things from the economy, chances are you're more willing to go out buying."

Meanwhile, the IPO of software-as-a-service vendor NetSuite on Thursday reflected a year for public offerings that was ultimately stronger than expected. Company shares closed at $35.50 after opening at $26.00. IPOs this year underscored confidence in sectors such as SaaS and storage, noted the 451 Group report. In the SaaS arena, SuccessFactors and DemandTec had strong IPOs. In the storage sector, Data Domain and 3Par had solid IPOs, 451 noted.

But the same factors that are likely to contribute to a slowdown in M&A will also probably cause a slump in IPO activity in 2008.

Most IT market researchers are forecasting a slowdown for at least the first half of next year. Growth in U.S. IT investment, for example, will drop to 4.8 percent in 2008 from 5.3 percent in 2007, according to Forrester Research.

In a year of tepid sales, only the best-run companies are expected to have the full confidence of investors. This week's earnings reports from Palm and RIM are a case in point. Palm shares dropped to their lowest point in four years on Wednesday, closing at $5.52, after the company reported a quarterly loss of $9.6 million for the quarter ending Nov. 30. Last year the company earned $12.8 million for the period. Palm stock has dropped about 50 percent in the past two months.

Reporting Thursday on the same quarter, RIM said BlackBerry sales boosted earnings to $370.5 million, compared to $175.2 million last year. Shares jumped by about $10 in after-hours trading, about an hour after the announcement.

Handset markets are booming, but vendors face some of the same pressures as PC makers: Competition has lowered margins. Vendors need to get it all right: good products, good management, and well-managed logistics.

"We view RIM as extremely well-positioned due to carrier partnership strategy, talented management and technology," said Citi Investment Research in a market commentary. On the other hand, Citi fretted that "we are increasingly concerned with Palm's internal controls."

Especially in the most competitive sectors -- such as PCs, handheld devices, telecom and Internet-based businesses -- 2008 will leave much less room for error than 2007, which, despite economic turmoil, turned out to be a strong year for tech earnings overall.