For Tech Investors, Price Isn’t Right
The price that Hewlett-Packard Co. is paying for Compaq Computer Corp. sent a bitter message to technology investors in general Tuesday: Not only did Compaq’s sellout smack of desperation, some analysts said, but the skimpy premium HP is paying seemed to snuff out hopes that tech share owners might be bailed out by takeover offers.
Though the HP-Compaq announcement helped spark an early rally in the tech sector Tuesday, sentiment turned bleaker as the day went on and some Wall Street pros passed ever-harsher judgments on the merger.
HP’s all-stock offer valued Compaq at $14.68 a share based on HP’s share price Friday. That was a premium of 19% above Compaq’s Friday closing price of $12.35.
That premium was well below what other takeover targets have fetched recently: The average premium offered in takeovers has been 41% this year, according to Thomson Financial/Securities Data.
Worse, HP’s premium evaporated in the market’s sour reaction, as HP plunged $4.34 to $18.87 and Compaq fell $1.27 to $11.08, both on the New York Stock Exchange. The offer of 0.6325 HP share for each Compaq share now values the latter at $11.93.
The stocks’ slide Tuesday and fresh declines in many other tech issues to new multiyear lows were demoralizing for many tech investors who already have suffered losses of 80% or more in their stocks from their 2000 peaks.
Despite the battering that many tech companies have taken in the market, however, the stocks’ price-to-earnings valuations remain high because in many cases the companies’ profits are dwindling just as fast as share prices.
Thus, just as many investors are reluctant to pay current tech share prices, potential acquirers also may be reluctant to bid significantly more for the firms in takeover offers, analysts say.
The punishment inflicted on HP and Compaq shares wasn’t necessarily an overreaction, some market watchers said.
“It’s a very realistic but not optimistic appraisal of what’s going on in tech land,” said Charles Pradilla, chief investment strategist at S.G. Cowen in New York.
Overcapacity in many tech sectors has reduced prospects to the point where technology company earnings could lag behind other industries in any economic rebound, experts say. And a recovery is by no means a sure thing in the near term, in any case.
In recent weeks, such tech bellwethers as Sun Microsystems Inc. have warned they don’t see a turnaround in the business before the second quarter of next year.
To the extent that there is further consolidation in the tech area, it will be “to survive, not because the companies are a perfect fit,” Pradilla added.
That may mean the prices paid by acquirers will be in line with HP’s offer for Compaq--that is, not at substantial premiums to the targets’ current share prices.
Compaq’s timing, when its stock already was hovering near a five-year low, should be taken as an especially discouraging sign for the broader technology area, said Charles M. LaLoggia, a Rochester, N.Y.-based money manager who specializes in takeover investing.
“If there were an upturn any time in the next six to nine months, it would be nothing for Compaq to double to $25,” LaLoggia argued. “The fact that [Compaq management] wouldn’t even wait for that tells me they just don’t see it happening.”
Compaq’s large cash reserves and low debt should have enabled it to ride out even the harshest downturn, as “harder-nosed” tech firms such as Dell Computer Corp., Intel Corp. and Applied Materials Inc. are doing, said Scott Black of Delphi Management in Boston.
Accepting so low a premium from HP, Black added, is “like a capitulation by Compaq, like they’re saying, ‘We’ve lost the will to win.’ ”
But David A. Katz, chief investment advisor for Matrix Asset Advisors in New York, which owns shares of both Compaq and HP, said that if the merger is executed properly the combined firm has “the potential to be a powerhouse.”
As for the low premium, if Compaq were selling out for cash, Katz said he would agree that it was like “throwing in the towel.”
However, because Compaq stockholders are being paid in HP shares, they will emerge with a one-third stake in a stronger entity, which Katz called a good deal, considering Compaq’s “depressed currency”--its own shrinking stock price.
In other words, the bullish take on the deal is that Compaq investors could make more money off a rebound in HP’s shares in the future compared with what Compaq alone might have realized.
