We’re seeing some big moves in the just after opening this morning. Some is good news, and some is not. First the bad news.
Seagate Technology PLC (NYSE: STX) is crumbling this morning following an earnings report last night that missed analysts’ estimates. The forecast for next quarter is for yet more weakness due to rising commodity costs and some production troubles. Disk drives use significant amounts of rare earth elements in magnets and motors. High and rising prices for the rare earths is playing havoc on margins. Seagate’s forecast for unit shipments in its next fiscal year is essentially flat. Combine flat shipments with higher costs and falling margins and you get a hit of about -17% to the share price, which is what is happening to Seagate this morning.
Network equipment maker Telefon AB L.M. Ericsson (NASDAQ: ERIC) missed both revenue and earnings expectations in its most recent quarter. The company did post growth in sales, but gross margins fell from 39% to 37.8% and that is the more closely watched metric. Explosive growth in smartphones has helped the company’s sales, but US sales have slowed as the US economy has stalled. Both of Ericsson’s joint ventures, one with Sony Corp. (NYSE: SNY) and another with STMicroelectronics NV (NYSE: STM) are also bleeding money and Ericsson might have to put up more cash in an effort to right the ship. Shares are down about -8.5% in early trading this morning.
On the brighter side, MedcoHealth Solutions Inc. (NYSE: MHS) has agreed to be acquired by rival pharmacy benefits management company Express Scripts, Inc. (NASDAQ: ESRX) in a deal worth $29.1 billion. Express Scripts will pay $71.36/share of Medco, of which $28.80 is cash. The premium is 27.9% of Medco’s closing price last night. The combined company will be by far the largest pharmacy benefits management company in the US. While the market is euphoric today, sending Medco shares up to a new 52-week high of $66.38 in early trading, Medco shareholders could balk at the cash portion of the deal. According to the announcement, the deal is expected to be “slightly accretive” to earnings in the first year, excluding costs related to the deal, and “moderately accretive” thereafter. There’s a long ways to go before this transaction is completed.
SFN Group Inc. (NYSE: SFN), a staffing-services company, has agreed to be acquired by Dutch firm Randstad Holding NV (OTC: RANJF) for $770 million in cash, a 53% premium to SFN’s closing price on Monday. SFN shares are up more than 51% on the announcement, but still short of their 52-week high. The deal will double Randstad’s US presence and it will become the third largest staffing service in the country. Randstad said it would use its existing credit lines to finance the deal. Unlike the Medco-Express Scripts tie-up, this looks a good combination that is not based on faltering operations.
Powerwave Technologies, Inc. (NASDAQ: PWAV), a provider of wireless communications technologies, has jumped nearly 7% this morning on news that it has made a deal to raise $100 million in a private placement of 2.75% convertible senior subordinated 30-year notes. The company will use about $25 million of the net proceeds to buy back 11.2 million shares of its common stock. The rest of the proceeds will be used to pay down debt and for general corporate purposes. As much as shareholders like share repurchases, borrowing money to make the purchases seems like a concession from management that it doesn’t have any really good ideas for growth. Still, everybody’s smiling today.
Paul Ausick
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