If there was ever a low-IQ week for tech stocks this was it.
demonstrated once again that it hasn't reached the bottom of its seemingly endless well of bad news and even worse accounting.
demonstrated that nobody in Redmond can hit a deadline, and
confused nearly everyone with the most perplexing earnings release and call in recent memory.
, meanwhile, discarded its strategy of relatively small targeted acquisitions and agreed to pay a surprisingly rich premium for
, a move that puzzled plenty of Wall Street types.
CA, though, stood out with an astonishing admission that previous management had, in effect, created a slush fund of employee stock options between 1997 and 2001. Here's the official rundown of what happened: "The company believes that in fiscal years prior to 2002, the company did not communicate stock-option grants to individual employees in a timely manner." Not timely is right; in some cases, the options hung around for as much as two years.
The liability for this strange practice could be as much as $540 million, CA says, the largest options-related hit to date, according to Patrick McGurn, senior vice president of Institutional Shareholder Services.
Why did CA's now deposed, disgraced, and in some cases, admittedly felonious former management pull just a stunt? The current management refuses to even speculate.
"This was the CA way; make up the rules as you go along," says McGurn.
McGurn says he can't come up with a valid explanation, but he speculates that management used the fund as a way to hand out options that were already in the money as a reward to employees.
Given CA's tarnished past, you'd assume the golden options went to former CEO Sanjay Kumar and friends, but the company says that was not the case; they went to the rank and file.
Given the unending series of problems at the software company, you have to wonder if CEO John Swainson isn't reconsidering his, well, options.
Wait Till Next Year
With sell-side analysts falling all over themselves to predict that Vista, the next version of Windows, will pull Microsoft's share price out of the doldrums, the latest delay in the release of Office is disquieting, to say the least. After all, the two products are so closely tied you have to wonder if Vista, already a couple of years late, is going to slip.
Plenty of people on Wall Street and in Silicon Valley seem to think so, although Microsoft denies it. On June 29, a Vista spokeswoman reiterated to
: "The (Office 2007) announcement today does not impact Windows Vista timing."
But Citigroup analyst Brent Thill doesn't buy that story. "Ramifications of this delay are that Microsoft will likely continue to shoot for a joint release of Office and Vista, so we expect to hear that Vista will also be pushed back to late 2006 for volume and late Q1'07 or possibly into Q2'07 for the consumer," he wrote in a note to clients.
Similarly, Goldman Sachs analyst Rick Sherlund figures Vista won't be generally available until April. Neither he nor Thill anticipate much of a revenue or earnings impact, but Thill raises an interesting point: "The risk is that these persistent delays could indicate quality issues that may dissuade enterprises and consumers from becoming early adopters." Goldman Sachs and Citigroup have investment banking relationships with Microsoft.
And don't forget, Microsoft keeps pulling features out of Vista. Earlier this week it said that WinFS, a new file system, will never be part of the new operating system. That's quite a change from the company's earlier position that WinFS would ship with the first version of Vista, which was revised some time ago to say that WinFS would ship as part of future releases of the new operating system. Now it's going to be rolled into other products.
Given the uncertainty around Vista's timing, Sherlund says the stock might actually benefit if the company simply concedes the inevitable and announces a firm date. We'll see.
The Price is Wrong?
When EMC bought VMware, a lot of people on Wall Street were mighty skeptical. What does a super geeky vendor of virtualization software have in common with a meat-and-potatoes purveyor of storage gear? As it turns out, quite a bit, and the purchase of VMware, which runs as an independent entity inside of EMC, has been a nearly unqualified success.
If you're an EMC exec, you'd like Wall Street believe that this week's $2.1 billion friendly takeover of RSA will likewise turn the jeers to cheers in short order. That, of course, remains to be seen.
It's clear, though, that investors are very skeptical. Start with the price, at $2.1 billion, EMC is paying five times fiscal 2007 earnings and 52 times 2007 earnings. At $28 a share, the purchase represents a premium of 45% over the previous day's close. Most commentary on the buy called the premium larger than expected, but EMC execs claim it's only a bit higher than the upside that other security companies have earned.
CA, for example, paid a premium of about 40% when it bought Netegrity in 2004, says Dennis Hoffman, vice president of info security at EMC.
Hoffman calls the acquisition "top-line driven" and "technology driven." RSA's encryption and authentication technologies will form the core of a new division within EMC. "If we hadn't purchased them, we were going to lose the chance to partner," he said in an interview. A number of other companies were bidding; although EMC won't say who the rivals were, both CA and
were rumored to be in the running.
When the deal was announced, EMC said that on a GAAP basis, it would hurt earnings by 3 cents a share in 2007and be neutral in 2008. On a non-GAAP basis, the company expects it to be neutral in 2007 and add 3 cents a share in 2008.
Hoffman argues that storage and security are moving closer together. When people store their data, they want it secured and access has to be authenticated, he says. "It's a natural progression for us," he says.
Not everyone agrees. And that is why the stock hit a 52-week intraday low of $10.11 on Friday, compared with the old low of $10.85. The stock closed the day with a loss of 28 cents, or 2.5%, to $10.97.
Sushil Wagle, an analyst with Seligman Technology, was not a happy investor (his company is long EMC) when news of the deal first broke. "Please, don't buy this company," he said shortly before EMC confirmed the takeover. "Security is an important area for EMC, but RSA and its tokens won't produce synergy."
Similarly, Deutsche Bank analyst Chris Whitmore panned the deal, saying that he foresees "less than 5% ROI on the deal; it's hard to see synergies." Goldman Sachs and Citigroup have investment banking relationships with Microsoft.