Wall Street Beat: Looking for growth in a mature market

Stock buybacks, layoffs and private equity buyouts are ways to jumpstart growth, but raise long-term questions

The specter of moderate global IT growth continues to hang over vendors' financial news, which this week includes IBM's stock buyback, distributor CDW's plan to go private, and layoff news from Motorola.

These moves are examples of how tech companies are dealing with global IT growth that most analysts say will be moderate -- somewhere in the 6 percent to 7 percent range. That's not a bad growth rate for a mature industry but nowhere near the double-digit growth rates that IT saw in the late 1990s.

In this climate, organic sales alone are often not enough to achieve the kind of growth that inspires investors and instills confidence in volume buyers. The types of moves announced this week often provide temporary excitement, but leave questions about long-term consequences.

IBM Tuesday announced it completed part of its previously announced stock buyback program, purchasing 118.8 million shares for $US105.18 per share. That equals about $US12.5 billion. IBM shares closed the day of the announcement at $US105.91, up by $US0.73. One reason investors like this sort of news is that, with fewer outstanding shares on the market, companies find it easier to report robust per share growth.

The long-term question, though, is whether companies would be better off spending money on product development, equipment, acquisitions or other investments. IBM is considered an R&D leader, so in this case the stock purchase was not criticized.

Another way of dealing with the pressure of having to show steady growth quarter after quarter is to simply get out of the public stock market altogether. CDW's announcement this week that it entered into a pact to be acquired by private-equity investment firm Madison Dearborn Partners (MDP) for $US7.3 billion is one such move. With the announcement, on Tuesday, CDW followed in the footsteps of similar moves to go private by companies such as electronic payments company First Data and customer information management software developer Acxiom.

The advantage of going private is that it's easier to focus on long-term strategy when company managers have to deal with a small cadre of investors. But new owners sometimes strip company assets and sell them off, or enact drastic cost cutting measures.

To assuage customers (and employees) John Edwardson, CDW chairman and CEO, said in a conference call Wednesday that he didn't expect layoffs, and that CDW management would stick around. CDW shares jumped to $US83.11 on the day of the announcement, up from $US75.56 the day earlier.

Cost cuts are another way of dealing with a tight market and falling profits. On Wednesday, Motorola said it will lay off 4,000 workers, expanding previous plans for layoffs. The company, which lost money last quarter, said the latest move would save $600 million annually. While investors often applaud cost control measures, staff reductions ultimately do nothing for the central issue facing tech companies: product development and marketing. Addressing this issue Wednesday in an investors meeting, CEO Ed Zander said the company will increase profits by developing an array of multimedia mobile devices, rather than rely on single, blockbuster products like its Razr phones.

Investors took a "show-me" stance. Company shares lost ground on the day of the announcements.

Dell fared better after it announced, late Thursday, that it will cut its 78,800-strong workforce by 10 percent. Within 30 minutes of the announcement, made as part of its quarterly report, Dell shares jumped in after-hours trading by $US1.63. Dell profits have slipped over the past year and it is still embroiled in an accounting inquiry, but investors have applauded cost-cutting moves by Dell over the last few months, especially since they have been accompanied by complementary plans to break with tradition and start selling through retail.

Join the newsletter!


Sign up to gain exclusive access to email subscriptions, event invitations, competitions, giveaways, and much more.

Membership is free, and your security and privacy remain protected. View our privacy policy before signing up.

Error: Please check your email address.

More about Acxiom AustraliaBillionBlockbusterCDWDellFirst DataIBM AustraliaMotorolaWall Street

Show Comments