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When Earth Rumbles, Will Silicon Valley Tumble?

As Silicon Valley remains firmly rooted as the global center of technology and innovation, rarely mentioned is one huge fact that could blunt a ton of good vibes: The area is due for a  major earthquake. “There are going to be infrastructure problems,” David Walters, Cisco Systems ( CSCO ) director of global safety and security told IBD. “If it’s 6.5 or greater, the bottom line is that a lot of people are going to be walking.” The U.S. Geological Survey says there’s a 72% chance of a magnitude 6.7 or greater earthquake on one of the region’s many faults in the next 30 years. The percentage shoots up to 89% for a magnitude 6 or greater quake, USGS scientist Morgan Page told IBD. Either could be catastrophic. “The Bay Area has the highest density of active faults per square mile of any urban center in the country, and on a long-term basis it has the highest amount of earthquake energy released per square mile of any urban center in the country,” David Schwartz, a geologist with the U.S. Geological Survey, told the East Bay Express in 2005. “So we’re really kind of living at ground zero.” Silicon Valley Earthquake Damages Could Near $200 Billion A magnitude 7 or greater quake would “likely” spur damage to buildings and infrastructure in the range of $95 billion to $190 billion, says Renee Lee, an analyst with Risk Management Solutions, a firm that models risk for insurance companies. “Despite the area being really well educated about earthquakes, and the substantial investments in infrastructure, we will expect to see some pretty significant damage if there’s a quake along the Hayward fault.” Scientists have long considered the Hayward fault one of the most likely candidates for a major quake within a few decades. The fault runs through Oakland and other heavily populated East Bay cities. What’s all but certain is that Silicon Valley will experience widespread utilities losses — water, power — as well as damage to buildings and infrastructure such as roads and bridges. A phenomenon called liquefaction — in which normally solid soil acts like a liquid — could wreak havoc on any firms with offices near the San Francisco Bay’s shore. Oracle’s main campus, for example, sits atop what’s called bay fill, a material that is highly susceptible to liquefaction. ( Oracle ( ORCL ) spokeswoman Jessica Moore refused to comment on the company’s business-continuity plans in the event of an earthquake, or any other natural disaster.) Facebook ( FB ) and Alphabet ( GOOGL ) also have large campuses located on land susceptible to liquefaction — though less so than Oracle’s (neither of these companies responded to requests for comment). The liquefaction risk to Apple ‘s ( APPL ) office in Cupertino is low. The good news is that the Internet will almost certainly continue to function, for the most part. Service disruptions are likely, but the core backbones that tie the Bay Area to the Internet will remain intact. That might not have been the case 15 years ago, though “even then there were major fiber cuts that the Internet weathered fine,” Mike Leber, CEO of Hurricane Electric, an Internet backbone provider, told IBD via email. And many Silicon Valley companies have been sure to locate data centers in other parts of the country, so service disruptions are less likely. “Our data centers are located at sites which have limited potential for severe weather and seismic events,” Yahoo spokeswoman Carolyn Clark told IBD in an emailed statement. Yet, though the experts can make educated guesses, no one knows how a big one might affect Silicon Valley, or any area, says Anne Wein, a USGS operations research analyst. “The hard work is going to be to get a description about what will happen,” she told IBD. “We’re just not there yet.” The USGS is studying the issue, what it calls “Project Haywire,” and is aiming to complete its research in April, according to spokesman Justin Pressfield. In the meantime, uncertainty will persist. “We haven’t had a major earthquake in the U.S. since we have become so connected with wired and wireless technology,” Wein said. “Do we have new vulnerabilities? How much redundancy is there? How will this new technology help us recover?” Of 15 large Silicon Valley tech companies — and several startups valued by investors at more than $1 billion — that IBD contacted for this report,  Adobe Systems ( ADBE ), eBay ( EBAY ), Oracle and PayPal ( PYPL ) declined to comment and nine did not return the request. Cisco provided access to executives for a wide-ranging interview, and Yahoo issued a brief statement. When asked why tech firms are reluctant to discuss business-continuity plans, Sam Singer, a public relations executive who specializes in crisis situations,  said tech companies are “better at talking about services and products. They’re not prepared to talk about public policy issues, safety issues, even though they ought to be.” He says that there’s no reason why companies shouldn’t be able to describe how they would deal with a natural disaster in the Bay Area without giving away proprietary information. “It’s important that companies discuss earthquakes,” Singer said. “They need to be leaders, and offer reminders to their employees, the public and the news media that we live in earthquake country.” Dick Evans, president of the Business Recovery Managers Association, a networking and information group for disaster recovery planners, told IBD that his group used to have more membership among major Silicon Valley firms. At the moment, he said, “we don’t have as many as we would like.” What Preparedness Might Look Like Cisco has been active in preparing for quakes. It might take the issue more seriously than others, in part, because it’s among the tech giants that were around during the Loma Prieta earthquake of 1989, Walters says. That quake, centered near San Jose and San Francisco, killed 63 people, displaced 12,000, destroyed an estimated $6 billion worth of property and caused an unknown amount of productivity losses. At Cisco’s main offices in San Jose, Walters says the company maintains what it calls “Arks,” which store water, food, tents and emergency supplies for all employees on site — enough supplies to last up to three days. And executives all carry three-day survival backpacks in their vehicles, he says. The company also has a mobile operations center that can staff 13 — and can turn it into a kind of mobile office for execs. The company has five command-and-control centers around the world — with satellite communications abilities and backup generators for incident response vehicles. And the company conducts earthquake drills at its main offices. “We have the right processes, right supplies,” Walters said. “We know as much as we can about the fault lines and we want to be as knowledgeable as possible.” He adds that USGS scientists come in from time to time to talk about the fault lines with Cisco’s safety and security team. The company also monitors incidents around the globe, and has a Tactical Operations team that it deploys on humanitarian missions to restore communications connectivity. Yahoo was willing to share a few details of its plans, though declined to provide access to business continuity executives. Spokeswoman Clark, in a statement, said “Yahoo has prepared our technology, as well as our physical spaces, to allow us to continue to run and operate our business either in California or other parts of the world in the event of catastrophe. We have invested at our mission-critical facilities to provide for alternative power supplies that will allow those facilities to run in the event of a loss of power or other utilities.”

Can Applied Materials’ Q1 Beat, Surprise Outlook Boost Chips?

Applied Materials ( AMAT ) stock popped late Thursday on Q2 guidance that indicates robust semiconductor demand despite chipmakers’ stumbling start to 2016 and the specter of Apple ‘s ( AAPL ) waning iPhone sales. In after-hours trading Applied stock jumped more than 7%, after closing up by a fraction in regular-session trading. Shares are down 8% for the year, reflecting a 9% depression in IBD’s 36-company Electronic-Semiconductor Equipment industry group. For fiscal Q1 ended Jan. 31, Applied reported $2.26 billion in sales and 26 cents earnings per share ex items. Both metrics were down 4% vs. the year-earlier quarter, but topped Wall Street expectations . The consensus of 22 analysts polled by Thomson Reuters was expecting $2.24 billion and 25 cents — in line with Applied’s three-months-ago view for $2.16 billion to $2.3 billion and 23-27 cents. Current-quarter guidance shattered estimates. Applied guided to $2.37 billion to $2.49 billion in sales and 30-34 cents EPS ex items. The low end of both guidance measures topped Wall Street’s model for $2.28 billion and 26 cents. Sales would be flat at the midpoint, and EPS minus items would soar 10% year over year. Applied’s guidance speaks well for the semiconductor community, which tripped early this year on lackluster iPhone sales, fears that Moore’s Law would compress growth, and macroeconomic weakness in China. IBD’s 41-company Electronic-Semiconductor Fabless industry group is down 10% thus far into 2016, matching the same plunge in IBD’s Electronic-Semiconductor Manufacturing industry group of 41 companies. Applied trails ASML Holdings ( ASML ) in market cap — $19.6 billion to $36.8 billion. Applied makes machines that manufacture semiconductors. ASML produces lithography gear, also used to make chips.

Ingram Micro Stock Jumps 23% After $6 Billion China Buyout Offer

Ingram Micro ( IM ) stock soared Thursday after China-based Tianjin Tianhai Investment said that it had reached an agreement to pay $38.90 a share, or $6 billion, for the Irvine, Calif.-based information technology company. Ingram Micro is a leading distributor of technology products and provider of technology services, with 2015 revenue near $44 billion. Its competitors include Arrow Electronics ( ARW ), Tech Data ( TECD ) and Synnex ( SNX ). The acquisition was announced after the market close Wednesday. Ingram Micro stock vaulted up 22.6% to close at 36.34 in the stock market today . Arrow Technologies stock closed up 1.9%, while Tech Data lifted 3.7% and Synnex 2.3%. Upon close of the merger, Ingram Micro says, it will become a subsidiary of HNA Group, a China-based company described as a leader in aviation, tourism and logistics. HNA is also the largest stockholder of Tianjin Tianhai, which is a shipping, logistics and financing company. Both Ingram Micro’s and Tianjin Tianhai’s boards have unanimously approved the transaction. The offering price was a 39% premium over the average closing price for Ingram Micro’s shares over the past month. The deal is expected to close in the second half of this year. Ingram Micro says that it will suspend its quarterly dividend payment and its share repurchase program prior to the closing of the transaction. After the deal was announced, Needham analyst David Rold changed his rating on Ingram Micro to hold from buy. “While difficult to tell what HNA’s ultimate intentions for the business are, we do not expect much change in near-term competitive landscape,” Rold wrote in a research note. “Our initial checks suggest business as usual for the time being.” Moody’s Investors Service placed the ratings of Ingram Micro on review for downgrade following the announcement. “The companies did not announce whether Ingram’s existing debt will be refinanced or assumed in connection with the closing of the acquisition,” Moody’s wrote in a research note. “The rating review reflects the uncertainty related to the post-acquisition capital structure, liquidity position and financial policies. “Moody’s will also assess Tianjin Tianhai’s and HNA’s financial positions and whether Ingram Micro will need to upstream dividends to help pay for the acquisition or for other corporate purposes.” While some potential sales of U.S. tech firms to Chinese buyers have raised regulatory concerns, the sale of a tech distributor such as Ingram Micro might not fall into that camp. U.S. chipmaker Fairchild Semiconductor ( FCS ) this week accepted a buyout bid from U.S. rival ON Semiconductor ( ON ) rather than a higher offer from Chinese investors, fearing a long and tricky regulatory review. An unsolicited bid for Micron ( MU ) by China’s Tsinghua Unigroup has also withered because of regulatory concerns. Image provided by Shutterstock.