In this age of consolidation and mega-mergers, it's not every day that a major technology company decides that what it really needs to do is get smaller.
Hewlett-Packard, which practically served as midwife for the birth of Silicon Valley, jolted Wall Street Tuesday with news that it will split apart into two separate publicly traded firms. One will focus on HP's computer and imaging operations, while the other will include its more diverse interests in medical technology, diagnostic tools, and chemical analysis.
The announcement ignited a broad market rally, which gradually lost strength and ultimately gave way to a broad sell-off. What happened? Basically, investors finally got around to thinking that if mighty HP recognizes a need to clean its plate, what does this mean for the rest of the tech sector and, by extension, the rest of the market?
These thorny questions led, inevitably, to the old worries about bloated share prices and the possible impact of a widely expected interest-rate hike. Traders needed no more incentive to promptly dump stocks and make off with profits from the earlier run-up.
The Dow Jones Industrial Average fell 27.17 points to close at 9297.61, and the Wired Index was 5.77 lower at 566.69. The Nasdaq Composite Index slid 36.15 to 2259.03, and the S&P 500 was down 10.66 at 1225.50.
Dow component HP (HWP) finished US$2.75 higher at $68.63. "We are taking this action to sharpen the strategic focus of our businesses, improve their agility, and increase their responsiveness to customers and partners," said CEO Lewis Platt.
Current shareholders will hold stock in both new companies, and each will have its own board of directors. An IPO for about 15 percent of the newly formed measurement enterprise's outstanding shares is expected by the end of the year. It will be the largest tech IPO in Silicon Valley history.
"It's pretty logical," observed Jerry Fleming, an analyst with Van Kasper & Co. "Hewlett's got a great position in the medical market. A lot of these businesses carry pretty hefty valuations that weren't being recognized by investors."
At the same time, HP's computer business has struggled to keep its head above water amid increasing competition and ongoing price reductions. It also has lost ground for big-ticket server sales to rivals International Business Machines and Sun Microsystems.
The notion of a leaner, meaner HP spurred investors to express mixed feelings about other PC powerhouses. Dell Computer (DELL) fell $2.50 to $78.06, and Compaq Computer (CPQ) was down $1.72 at $31.81. But IBM (IBM) lost 56 cents to $167.81, while Apple Computer (AAPL) was 88 cents higher at $34.63.
On the semiconductor side of things, leading chipmakers had their own problems to deal with. Intel and Micron Technology were both lower as NationsBanc Montgomery Securities downgraded each company's stock to "hold" from "buy." Intel (INTC) shed $7.25 to $109.81, and Micron (MU) was down $3.25 at $54.25.
PC direct seller Micron Electronics (MUEI), meanwhile, plunged 18 percent to $11.81 after warning that its second-quarter sales and earnings may decline as much as 9 percent from the previous quarter. It blamed a slump in computer sales for the revised forecast. Analysts had been looking for profit of 14 cents a diluted share.
Sun (SUNW) rose $1.63 to $98.88 after saying it will hand over its microprocessor designs to outside developers free of charge. The move -- the first by a major chipmaker -- is intended to woo programmers into coming up with new products for Sun's systems. Morgan Stanley Dean Witter reiterated a "strong buy" rating for Sun's stock.
In telecom, equipment maker Xylan (XYLN) soared 33 percent to $35.75 on word of its $2 billion acquisition by France's Alcatel. The $37 a share purchase price represents a 37 percent premium over Xylan's Monday close. Alcatel, which already owns 6 percent of Xylan, is seeking a more active role in global voice and data networks.
AT&T (T), Lucent Technologies (LU) and Motorola (MOT) were mixed after joining forces to develop a software language that would allow phone users to dial up the Internet and have content read to them. The service would focus more on email and sports scores than it would on, say, wordy financial columns.
Also from the Net front, At Home Network (ATHM) surged $7.88 to $115.56 after a two-for-one stock split was announced. The company's shares have tripled in the past year. Separately, Credit Suisse First Boston began coverage of the cable-based access provider with a "buy" rating.
BancBoston Robertson Stephens took a closer look at a pair of old favorites and liked what it saw. EBay (EBAY) climbed $9.44 to $117.06 as the brokerage reiterated its "buy" rating for the online auctioneer, while Amazon.com (AMZN) slipped despite a continued "strong buy" recommendation.
Lycos (LCOS) advanced $2.19 to $90.75 after USA Networks CEO Barry Diller explained to an investment forum how the merger of his company's electronic retailing assets with the portal is "a grand slam." He said the market "overreacted" to the deal by driving down Lycos' share price almost 30 percent since the tie-up was announced.
Diller added that he isn't even thinking about renegotiating the terms of the complex marriage. For its part, Lycos is now in the process of acquiring Wired News' parent company.
Lastly, Disney (DIS) fell 63 cents to $34.19 after coming up with a novel way of paying CEO Michael Eisner's annual super-bonus. The company's ABC broadcasting arm is charging no less than $800,000 for advertisers to run a 30-second spot during Wednesday night's "20/20" interview with Monica Lewinsky. That's about five times the usual rate for the show.
Is the free market great or what?
