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Dain Rauscher lower forecasts for Mercury after terror attacks on U.S.

Analysts expect further cuts in IT spending and tougher deal-making as haggling turns fierce

Dain Rauscher Wessels reiterated a Buy at an Aggressive Risk recommendation for Mercury Interactive (Nasdaq:MERQ).

But analysts Sara Mattson and Deana Schreindl slashed its price target from $50 to $35, still 77% above its price on Nasdaq.

Mattson and Schreindl lowered forecasts for Mercury, a provider of performance management and monitoring solutions, based on industry expectations of reduced IT spending after the attacks on the U.S. on September 11.

They pointed out several key factors that could impact badly on Mercury's results.

Firstly, expect Mercury to close less deals as shrinking companies trim their orders. Telcos and financial service providers are also expected to slash non-core IT spending

Moreover, the U.S. government has also frozen numerous projects.

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Another factor that closing deals takes longer and requires more effort. Haggling is expected to be fiercer as customers balk at signing.

Companies are currently revamping their annual budget and setting new priorities, the analysts added. They will spend on activities such as system optimization and management but allocate less resources to system integration, application development and testing and e-business.

Dain Rauscher slashed its Q3 profit forecast for Mercury from 18 to 16 cents, and its sales forecast to $85 million from $95 million.

For 2001 the analysts estimate revenue of $366.6 million, rising to $420 million in 2002.

Previous forecasts were of $387.2 million in 2001 and $465.5 million in 2002.

They predict EPS of 72 cents instead of 76 cents for 2001, rising to 90 cents or $1 in 2002.