By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- Last week was a banner week for
tech mergers with Facebook Inc.'s deal to acquire messaging service
WhatsApp Inc., and that could point to a big year for tech deals,
possibly the next big driver for stocks.
Tech companies are sitting on cash as organic growth becomes
more difficult to come by, according to M&A analysts. So expect
more deals, and a lot more M&A buzz that gets investors
thinking about which stocks are ripe for buyouts.
Tech stocks outperformed last week. The tech-heavy Nasdaq
Composite Index (RIXF) closed up 0.5% for the week, while the Dow
Jones Industrial Average (DJI) closed down 0.3% and the S&P 500
Index (SPX) slipped 0.1%. Year-to-date results show much the same
story: the Nasdaq has risen 2.1%, the Dow industrials has fallen
2.9%, and the S&P 500 has slipped 0.7%.
Late Wednesday, Facebook (FB) announced it was buying WhatsApp
for $16 billion in cash and stock plus $3 billion in restricted
stock units. The deal pushed down Facebook's stock price but it
rebounded the next day, reaching a new high. Facebook reportedly
beat out Google Inc.(GOOG) for WhatsApp.
Speculation also surrounded a possible acquisition of Tesla
Motors Inc. (TSLA) by Apple Inc. (AAPL) given recent talks between
Tesla CEO Elon Musk and Apple executives.
While 2013 was forecast to be a breakout year in M&A, the
value of global M&A deals actually declined by 6% from 2012,
and the number of announced deals slipped by 7% to the slowest
period since 2005, according to Thomson Reuters data.
Technology M&A, however, has been a bright spot, especially
with big ticket acquisitions. The value of tech deals jumped 65% to
$188.2 billion last year, according to Ernst & Young, with
cloud- and mobile-based technology at the forefront of the
trend.
Facebook's WhatsApp deal brought tech M&A year-to-date
volume to $49.9 billion, a 41% increase from the same point in
2013, the highest year-to-date volume since 2000, according to a
recent note from Michael DiSalvo at Dealogic. That even includes
Silver Lake Partner's February 2013 announcement it was taking Dell
Inc. private for $24.4 billion.
"The amount of deals being done recently speaks to companies
struggling to grow their top line," said Paul Nolte, portfolio
manager at Kingsview Asset Management. "It's difficult to grow
organically even for a Facebook."
Facebook's eye-popping purchase really moved the needle. While
the total dollar volume of tech deals is up this year, the number
is down -- 24% lower at 677 from this time last year, according to
Dealogic.
The strain on companies to expand sales has been obvious during
this earnings season, which has generally received fair but not
stellar grades. On top of companies blaming the weather for poor
sales, a great many have indicated a tough business environment
going ahead, Nolte said.
About 82% of companies issuing an earnings forecast for the
first quarter have guided below the Wall Street estimate, according
to John Butters, senior earnings analyst for FactSet. While that's
below the negative forecast percentage of 88% this time last
quarter, it's still well above the five-year average of 64%,
Butters noted.
For the fourth-quarter, reported earnings have grown 8.5% for
the S&P 500, while revenue has increased by 0.8%, according to
FactSet.
Tech M&A to be 'strong' at worst, 'blockbuster' at best
In fact, the day before Facebook announced the deal, Ernst &
Young said in a report that 2014 will be a strong year for
technology M&A at worst, and a "blockbuster" at best.
"I expect activist shareholders to continue challenging
technology companies in 2014 to put 'excess' cash to use," said
Ernst & Young's Joe Steger in a recent note.
Read: Investor activism is at a 5-year-high and they're
targeting bigger companies.
He points to $832 billion in cash and investments concentrated
in just the top 25 global technology companies. Activist
institutional investors are likely to push corporate boards to
pursue special dividends, share repurchases, operational
improvements or more strategic options around acquisitions.
On Thursday, PricewaterhouseCoopers provided the same
assessment, noting that the lines between software companies and
Internet-based companies continue to fade as cloud- and
mobile-based technologies catch on.
"Disruptive technologies are driving change at a dizzying pace,
heightening the need for continuous innovation," said Rob Fisher,
PwC's U.S. technology deals leader, in a statement. "M&A is
playing an instrumental role for larger technology enterprises
seeking to achieve growth."
That trend of fewer but higher-priced deals is holding up in the
broader market with the volume of global M&A up 13% at $504.3
billion year to date, but with fewer deals (4,289 versus 5,630 in
the year-ago period), according to Dealogic.
Fewer but higher-priced deals don't indicate a buying frenzy but
suggest buyers are deliberating more before striking a deal.
Other high-profile M&A events so far on the year include
Comcast Corp.'s (CMCSA) $45 billion agreement to buy Time Warner
Cable Inc. (TWC), Actavis PLC's (ACT) $25 billion deal for Forest
Laboratories Inc. (FRX), Signet Jewelers Ltd. (SIG) offer for Zale
Corp.(ZLC) , and on Friday, G Asset Management's offer to buy a 51%
stake in Barnes & Noble Inc. (BKS).
A strong M&A season could drive stock prices higher as stock
pickers hunt out the next target, causing bargain-hunting companies
to pull the trigger on a deal sooner.
With more advancing stocks than decliners, Nolte sees a higher
market trajectory as "the path of least resistance." Weak Chinese
data and a divided Federal Open Market Committee lknocked stocks
down last week, but they eventually bounced back.
"Markets are looking past poor economic data at this point and
are very willing to believe that the global economy is in the
process of improving," Nolte said.
Also, in a note Friday, B. of. A Merrill Lynch said fund flows
into stocks rose to their fastest pace in three months.
Earnings next week: Salesforce.com, Gap, solar
Fewer than 50 components of the S&P 500 report earnings this
week. The lion's share will come from retailers, smaller energy
companies, and utilities, leaving only a handful of companies left
to report in later weeks.
The one Dow component scheduled to report is Home Depot Inc.
(HD) on Tuesday.
Retailers include Macy's Inc.(M) , Target Corp.(TGT) , Dollar
Tree Inc.(DLTR), Kohl's Corp.(KSS) , TJX Cos.(TJX) , Lowe's
Cos.(LOW) , Gap Inc.(GPS) , Ross Stores Inc.(ROST) , Best Buy
Co.(BBY) , and L Brands Inc. (LB)
Energy equipment and services companies such as Transocean Ltd.
also report results, with oil and gas companies such as Oneok
Inc.(OKE) , EOG Resources Inc.(EOG) , and Chesapeake Energy Corp.
(CHK) also reporting.
Utilities Edison International(EIX) , First Energy Corp.(FE) ,
Pepco Holdings Inc.(POM) , AES Corp.(AES) , NRG Energy Inc.(NRG) ,
CenterPoint Energy Inc.(CNP) , and Sempra Energy(SRE) will also
make a big showing. Those results could test a recent run-up in
utilities as the year's best performing S&P 500 sector with a
6.3% gain.
Other notable earnings for the week include Cablevision Systems
Corp.(CVC) , First Solar Inc.(FSLR), SolarCity Corp. (SCTY) ,
Autodesk Inc.(ADSK) , and Salesforce.com Inc. (CRM)
Economic data on tap
Also Federal Reserve Chairwoman Janet Yellen will testify before
the Senate Banking Committee on Thursday, the formerly-known-as
Humphrey-Hawkins testimony that was rescheduled due to weather.
On the housing front comes the Case-Shiller home price index and
FHFA home price index for December on Tuesday; January new home
sales on Wednesday; and January pending home sales on Friday.
Concerning consumer data: February consumer confidence data is
released on Tuesday and the February University of Michigan
consumer sentiment index is released on Friday.
Production data comes in the form of January durable goods
orders on Thursday and February Chicago PMI data on Friday, along
with the fourth-quarter revised GDP figures.
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