Credit concerns dampen IPO, M&A news

IPO news, acquisitions, and strong corporate profits continued to stoke excitement for IT investors this week. Worries about the U.S. housing and credit markets, however, are beginning to cast a shadow on IT sector forecasts for the rest of the year.

“The picture I’m painting isn’t very pretty,” said Eric Gebaide, managing director of Innovation Advisors, a New York investment firm.

“The groundwork for the acquisitions and IPOs we’ve seen lately was laid months ago; the real question is what happens going forward,” Gebaide said.

In the first half of the year, better-than-expected demand for hardware and enterprise software instilled confidence in IT vendors. Venture capital deals and initial public offerings, at their highest levels in years, also pointed to a healthy excitement in the sector.

This week the big deals were all about virtualization technology, which has become popular as datacenters wring maximum efficiency out of servers. VMware’s IPO Tuesday capitalized on the trend. It closed at $51 per share, more than 75 percent above its official offering price of $29, and drifted upward through the week, even as concerns about credit markets caused stock exchanges to plunge. EMC acquired VMware in 2004 for $635 million, and announced in February its plan to sell off 10 percent of VMware in an IPO.

On Wednesday, Citrix Systems upped the ante with plans to acquire virtualization vendor XenSource for approximately $500 million to enable the application delivery software vendor to enter both the server and desktop virtualization markets.

Meanwhile, vendor financial news was also good this week. Hewlett-Packard reported Thursday that net earnings climbed 29 percent from one year earlier, fueled by laptop sales. For its third fiscal quarter, ended July 31, HP posted net income of $1.78 billion, compared with $1.38 billion, for the same quarter last year.

On Wednesday, storage-product maker Network Appliance announced that its last quarter net earnings fell 37 percent from one year earlier. But the drop was not as bad as the company has warned, and company executives issued an upbeat forecast for the current quarter, leading several brokerages to raise their ratings on the company. Network Appliance shares rose by $1.11 Thursday to close at $25.27.

But macroeconomic worries about the slumping U.S. housing market, and related forecasts about potential defaults on mortgage payments and a resulting tightening of debt markets, have had a sobering effect on IT investors. Though individual IT companies’ share prices have held steady, the tech-heavy Nasdaq exchange has been hammered along with other markets. Even as HP was announcing stellar results, the Nasdaq closed Thursday at 2,451, having lost in the past week the gain it has made in the past five months.

“The debt market affects every piece of the IT puzzle,” said Innovation Advisors’ Gebaide. If consumer credit is tight, cutbacks on spending can result, and the same thing on a bigger scale occurs in the business arena for IT products, noted Gebaide. High costs of debt also put a damper on M&A and IPO activity, he said: On one hand, it’s harder to raise cash for acquisitions, and on the sell side, companies are less likely to get high valuations.

Venture capitalists investing in startups and vendors contemplating acquisitions or sales are likely to proceed cautiously for the next few months, with a sharp eye out for reports of mortgage defaults and any ripple effects they have on debt markets.