Microsoft's $8.5 billion Skype deal lifts stocks

Corporate deals and strong earnings have been credited with driving stocks higher this year — and Tuesday saw a bit of each.

Corporate deals and strong earnings have been credited with driving stocks higher this year — and Tuesday saw a bit of each.

The biggest news, that Microsoft Inc. said it would buy Internet telephone service Skype for $8.5 billion in cash, is another sign that cash-rich companies are starting to spend. Corporations built up a record amount of cash over the last several years, and they have started using it to purchase rivals, pay dividends and also expand their businesses. That, in turn, has led to increased confidence among money managers and other investors that stocks are going to continue to rise.

Large companies also want to put their cash stockpiles to work because they're getting minimal returns on them, said Oliver Pursche, president of Gary Goldberg Financial Services. Interest rates for short-term savings pay less than 1 percent. "The crisis is behind us," he said. Companies "don't need this much cash anymore."

Microsoft had $50.15 billion in cash and short-term investments at the end of March.

The Skype purchase would be Microsoft's largest in its 36-year history. It follows AT&T Inc.'s announcement in March that it would buy T-Mobile USA for $39 billion and Johnson & Johnson's $21.3 billion deal announced last month to acquire Synthes, a maker of medical instruments and implants.

CKx Inc., which owns the rights to the names and images of Muhammad Ali and Elvis Presley, jumped 22 percent after it agreed to be bought by private equity investors. The buyout group will pay about $511 million for the company, which also owns the "American Idol" television show.

Also on Tuesday, dairy producer Dean Foods Co. and Medifast Inc. reported earnings that beat analysts' expectations. Dean had a stronger start to the year than it expected and raised its forecast for full-year earnings. The company also said it would raise prices to help combat falling milk sales. Dean jumped 11 percent.

Medifast, which operates a weight-loss program, rose 17 percent.

Boston Scientific Corp. sank 9 percent after the medical device company said its president and CEO, Ray Elliott, will retire at the end of the year. The company is looking for his replacement.

The Dow Jones industrial average rose 75.68 points, or 0.6 percent, to close at 12,760.36. The Standard & Poor's 500 index rose 10.87 points, or 0.8 percent, to 1,357.16. The Nasdaq composite index gained 28.64 points, or 1 percent, to 2,871.89.

Stocks have risen sharply in 2011, driven by strong earnings reports from major U.S. companies such as heavy equipment maker Caterpillar Inc. and Apple Inc. The S&P 500 is up 8 percent, more than it gained in five of the last 10 full calendar years.

Companies in the S&P 500 are on track to report first-quarter earnings growth of 19 percent, according to FactSet. That's far ahead of the 11 percent that analysts were forecasting at the end of 2010. Nearly nine out of ten companies in the index have reported results already.

Crude oil wavered but gained $1.33 to settle at $103.88 per barrel. The Bureau of Labor Statistics said Tuesday that higher fuel costs drove prices for imports into the United States up 2.2 percent last month. It's the first time import prices have topped 2 percent in consecutive months since June 2008.

Metals futures recovered more of their losses from last week's sell-off. Silver rose to $38.48 per ounce. Silver has more than doubled over the last year, but is still about $10 below where it was at the end of April.

Nearly five shares rose for every one that fell on the New York Stock Exchange. Trading volume was 3.5 billion shares.

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