Google's acquisition of YouTube and a shakeup at security vendor McAfee are giving IT investors something to mull over as they brace for the wave of technology-vendor financial reports due next week.
Both the YouTube acquisition and the McAfee shakeup, caused by stock-options questions, point to larger trends. The Monday announcement that Google will buy the video-sharing site YouTube in a US$1.65 billion stock transaction underscores the importance of the Web 2.0 concept. Web 2.0 is basically about Web sites adopting technology that allows for user-generated content, and for the sharing of opinions about content.
YouTube did an end-run around established 'Net superstars like Google and Yahoo Inc. by letting anyone put up video on its site. The Google acquisition of YouTube is just the latest example of big companies scrambling to jump on the Web 2.0 bandwagon via acquisition of nimble-footed startups. Sony bought the Grouper video site in August. An early example of a Web 2.0 deal was last year's acquisition of the Flickr photo-sharing site by Yahoo. Now Yahoo is reported to be in talks to buy the social-networking site FaceBook.
Traders liked the Google deal. Company shares (GOOG) closed at US$429.00 on Monday, the day the deal was announced, up US$8.50. The long-term question is, what will big companies do with smaller, innovative sites? Will they leverage the newly acquired technology and development teams to do something innovative? Yahoo may offer a model. Initially, it kept Flickr separate from its Yahoo Photos service, but has adopted many of Flickr's features, such as photo tagging and sharing.
Meanwhile, the McAfee story this week was the latest reminder that the corporate options scandal continues to cast a shadow. McAfee announced Wednesday that it fired its president, Kevin Weiss, and that Chief Executive Officer (CEO) and Chairman George Samenuk is quitting, as a result of an options backdating problem. The move did not scare away investors: company shares (MFE) closed Wednesday at US$26.64, up by US$0.85. But more than 100 companies, many of them IT companies, are being investigated for options backdating.
Awarding stock options at discounted prices is legal, as long as companies expense the operation properly. But to save money, many companies illegally backdated stock option grants to periods when shares were priced low. The scandal affects the biggest names in IT. Recently Apple Computer Inc. acknowledged that Steve Jobs knew about options backdating, though the company stressed that he was not aware of the implications.
Over the next few quarters companies like McAfee, CA and dozens of others may have to restate earnings by hundreds of millions of dollars. It is not an uplifting prospect as IT investors await a wave of earnings reports from IT bellwethers. The Dow Jones Industrial Average index of large companies has been breaking records on an almost daily basis over the past week or so. But fierce price competition in hardware and pressure on corporate IT spending plans may prevent the IT sector from taking off like companies covered by the Dow. So uncertainty about prospects for IT sector as a whole prevails.