With all eyes focused on the
spying scandal, it's worth noting that the market's collective memory -- when it comes to ethics and the like -- is exceedingly short.
Case in point:
Research In Motion
, the latest company to announce that something was amiss when it handed out options like candy to greedy children.
CEO Jim Balsillie said the "errors" -- he didn't use the word backdating -- go all the way back to the company's IPO in 1997 and will result in the restatement of all of the company's subsequent earnings. To be sure, the amount of money that is apparently involved, $25 million to $45 million, isn't even material. And the announcement was completely overshadowed by the company's solid second-quarter and bravura guidance for the third quarter.
Still, you might think that a 13-year-long string of "errors" might cause some concern on Wall Street. It didn't. The stock soared more than 20% after the announcement and held that high ground in Friday's session.
One reason, of course, is that RIM has plenty of company. Well over 100 public companies, mostly in technology, have 'fessed up to backdating. It's one thing to be the third company to get caught up in a scandal; it's quite another to be the 103rd.
But boredom and short-term memory loss aren't the only reasons Wall Street blew off the confession, says Gary Lutin, an investment banker who runs a forum for investors in
. "The shock is gone. Now investors have a checklist: What's the legal cost, what's the accounting cost and what effect will this have on outstanding debt?" he says.
Why outstanding debt? When a company fails to file a quarterly or annual report, it is generally in violation of a standard covenant that allows debt holders to declare a default and require full repayment. Knowing this, says Lutin, hedge funds have been buying the discounted bonds of companies which have announced that they will miss filing deadlines and demanding some payment or concession to waive the default.
Luckily for RIM, the company doesn't have much long-term debt, just $6.9 million vs. $1.1 billion in cash and short-term investments. And that means the hedge funds have no play (or prey), and investors can enjoy the soaring stock price.
Comments Lutin. "I wouldn't say the backdating scandal is dead; I'd say it's reached a state of maturity."
In other words, business as usual.
Big-Cap is Back
and other "dead money" tech stocks enjoying a good run, is it too late to get in?
Not at all, says John Schloegel, vice president for investment of Capital Cities Asset Management. CCAM, a sector-rotation specialist which has some $220 million under advisement or management, this week completed a shift from commodities to cash and now software. "Unlike hardware-oriented technology companies, software producers don't have to worry as much about competition from low-cost producers overseas," he says.
CCMA's time horizon tends to be several months to a year, and for now, Schloegel says, "We think there is a rotation taking place where large-caps are outperforming small-caps, and we think the trend can continue."
Daniel Morgan, portfolio manager for the $5.45 billion Synovus Investment Advisors, has a cautious outlook on Microsoft (his company holds it) and agrees that the day of the small-cap stock is over, at least for now.
Historically, he says, when GDP growth is lower than the fed funds rate, as it is today, small-cap firms tend to underperform. Part of the reason: Small companies don't have the same access to capital markets that their larger brethren do and are therefore hurt more by higher interest rates. Smaller companies also tend to have a higher exposure to consumer spending, which can be hurt by higher rates.
bottomed in mid-July, another one of Schloegel's picks,
, has appreciated by 35%, while Oracle has gained 19% and Microsoft, the deadest of dead-money stocks for some time, has gained 17%.
Although an argument can be made that the market has already baked in the good news about these stocks, Schloegel disagrees. "There is plenty of room for these stocks to run higher, especially since the
tech sector has been out of favor for so long," he says.
Schloegel even sticks his neck out a bit, saying that two rather unpopular software stocks, CA and
will move up as a new round of investors come back to the market.
Summertime Feeding Frenzy
Business activity tends to slow during the summer quarter, but that wasn't the case in the M&A market this year. A survey by 451 Group shows that the third quarter saw 954 new tech and telecom M&A transactions worth a combined $94.8 billion.
Spending on M&As in the tech sector this year is already ahead of the total for all of 2005.
In the first three quarters of 2006, tech and telecom acquisitions totaled $374 billion, up 65% from the $229 billion spent in the first nine months of 2005, and compared with a spend of $357 billion during all of last year.
During the third quarter, 21 of the deals were valued at more than $1 billion; so far this year, there have been 53 billion-dollar transactions worth a total of $295 billion. That's almost double the level of big-ticket spending in the same period last year, which was $164 billion. "This activity is being driven by nearly unprecedented cash holdings in corporate treasuries as well as private equity funds," says analyst Brenon Daly.