Wall Street Beat: Microsoft deal, Intel dividend buoy tech

Macroeconomic worries and Cisco's earnings report cause concern, but IT still rides high

Though Cisco had disappointing earnings news this week, the Microsoft deal to buy Skype, an Intel dividend and solid financials from Symantec helped keep confidence in IT high.

Microsoft's US$8.5 billion deal to buy Web phone and video service company Skype, announced Tuesday, lifted markets across the board, even though some analysts grumbled that the price was high for a company that has had a patchy history both financially and organizationally.

If it is approved by regulators, it will be the largest acquisition in Microsoft's history. Microsoft said it will incorporate Skype functionality into its gaming devices and Windows Phone operating system as well as various communications offerings such as Outlook. Microsoft CEO Steve Ballmer also promised to maintain Skype compatibility with non-Microsoft products.

Even though Skype has close to 170 million monthly users, it has had a troubled earnings history. EBay bought Skype, founded in 2003, for $2.6 billion plus other cash-related incentives in 2006, but in the ensuing three years only managed to wring one year of profits from it, finally dumping it for $1.9 billion to a private-investment group.

But the deal has potential for Microsoft, which is playing catch-up in Web mobile communications and video, and has vast resources to enhance and integrate the Skype technology.

"This will put Microsoft back in the game on the larger playing field against newer and faster-growing companies like Google and Apple who have also expanded into the telephony business with their wireless Android and iPhone," said independent analyst Jeff Kagan in an e-mail.

Coming after AT&T's March announcement that it planned to acquire T-Mobile for $39 billion, and Intel's announcement, also Tuesday, that it would increase its dividend, investors apparently took the Microsoft announcement as another sign that cash-rich IT and telecom companies are ready to start disbursing large sums to purchase technology in a fast-paced market, and also to start paying back investors after years of hoarding cash from record-breaking earnings. All U.S. exchanges jumped on the news, with the tech-heavy Nasdaq jumping Tuesday by 28.64 points to 2871.89.

Intel's dividend announcement was particularly gratifying to investors who have seen the company's shares lag behind other chip makers, even though it continues to dominate its market. The company will increase its quarterly dividend to $0.21 per share, up from $0.184, in an effort to create investor confidence.

"Intel's current and projected growth is generating strong cash flow, allowing us to further increase our dividend," said President and CEO Paul Otellini in a statement. Intel forecasts a record 2011, with sales increasing by 20 percent.

Though Intel is globally dominant, the chip landscape is shifting as mobile-device use grows and chip designer ARM gains traction. While Intel shares have appreciated 5.8 percent over the past year, the Philadelphia Semiconductor Index of sector stocks has risen 22 percent. Intel shares, however, jumped $0.27 to $23.03 Tuesday after the dividend announcement.

Symantec, a bellwether for the security software arena, had good news Wednesday when it reported a 9 percent year-over-year gain in fourth-quarter profit, to $1.67 billion, and a 3 percent increase, to $6.19 billion, in revenue. Shares jumped $1.01 on the news to close at $20.42 Thursday.

The big disappointment of the week came from Cisco, which on Wednesday reported that sales for the quarter ended April 30 grew at a sluggish 4.8 percent pace year over year, coming in at $10.9 billion. The networking giant said net income was $1.8 billion, or $0.33 per share, down from $0.37 per share one year earlier. It also said that it will cut jobs in order to focus on core routing and switching businesses.

Though some analysts applauded the move to get back to fundamentals, the company also said it no longer has a revenue target of 12 percent to 17 percent year-over-year gains. It declined to give specific guidance for next year.

Canaccord Genuity tech analyst Paul Mansky downgraded shares of Cisco and reduced his price target from $24 to $20 following the earnings report. "Cisco has yet to offer an initial look into 2012 -- other than the $1B expense reduction. We view this omission as a next likely shoe to drop," Mansky said in a research note. Mansky downgraded Cisco shares from buy to hold.

Tech stocks declined Friday morning as exchanges slipped across the board, burdened by macroeconomic concerns. The Labor Department Friday said the Consumer Price Index creeped up by 0.4 percent in April, making for an overall 12-month price increase of 3.2 percent, the biggest year-over-year jump since before the recession. Stocks fell globally as well, as the European Union warned that bailouts of Greece, Ireland and Portugal as a result of the countries' sovereign debt burden could be larger than previously forecast.

Nevertheless, strong corporate earnings in IT, along with mergers and acquisition news, have kept the tech sector stoked. Computer stocks on the Nasdaq, for example, are up 6.32 percent for the year.

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Tags business issuesCisco SystemsskypesymantecMicrosoftfinancial resultsintel

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Marc Ferranti

IDG News Service
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