Economist Ed Yardeni, chief investment strategist at Oak Associates, thinks the tech sector is ready to regain leadership of the stock market. And he believes robust growth and strong stock prices will produce an M&A boom in the sector, as players scramble for advantage in a converging market for telecom, tech, and the Internet. I'd through media into the mix as well. His website is only available to subscribers. But here's the gist of his argument, which was laid out on Nov. 18:
"The tech-heavy Nasdaq rose yesterday to 2220, the highest since June 2001. What's all the excitement about? The Internet is hot again. Google just rose to $400 per share. Advertising revenues are soaring for Google, Yahoo, MSN, and AOL. Cisco is reportedly acquiring Scientific-Atlanta. This could be the beginning of a wave of M&A activity in the Tech sector as the lines between the Internet, television, and telecommunications disappear. Tech companies are among those with the most cash sitting on their balance sheets. All this activity could also boost spending on the tech hardware and software necessary to integrate these rapidly merging businesses. All this activity may provide the answer to the following oft-heard question these days: What industry will lead economic growth in 2006 if housing continues to slow? The answer might very well be Technology! It may be doing it already. The y/y growth in industrial production of information technology has been significantly outpacing low-tech output since the start of the current economic expansion, and now it is showing signs of rising at even a faster pace ..."
Yardeni believes the tech boom will differ from the boom of the late '90s. It will be global this time around, and demand from China and India will help U.S. producers. But the global economy will be more competitive than ever, controlling prices and helping keep a lid on interest rates. He expects that to be good for stocks. And who knows, it might even temper weaknesses in the housing market. He thinks that competition in a tech-driven global economy helped keep the economy going during the rise on energy prices. Now that energy prices seem to be moderating, the risk of higher inflation and higher interest rates is falling, too.
As a new M&A boom takes off, the question is who will benefit. For now, it appears that the consolidators and potential winners are likely to be portals such as Google and Yahoo, which are challenging the dominant players of tech and media, from Microsoft to Time Warner.