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Rivals eye HP-Compaq
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September 4, 2001: 3:33 p.m. ET
Merger to create world's top PC maker could give Dell, IBM more market share
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NEW YORK (CNNfn) - Shares of Hewlett-Packard Co. dropped more than 18 percent Tuesday as many analysts viewed the company's $25 billion takeover of Compaq Computer Corp. a win for rivals Dell Computer and IBM.
The merger of Hewlett-Packard and Compaq will unite two under-performing companies that will eventually seek to control 19 percent of the worldwide PC market. The new company, called Hewlett-Packard, plans to slash about 15,000 jobs while executives said the merger will create $2.5 billion in annual cost savings down the line.
News of the purchase caused Compaq's shares to shed nearly 6 percent in afternoon trading while Hewlett Packard plummeted.
The takeover is HP's attempt to emulate the success of IBM, said analyst Tom Kraemer of Merrill Lynch. "IBM has proven that the services/solution centric approach to the market can build shareholder value," Kraemer wrote in a research note.
Combined with Compaq (CPQ: down $1.27 to $11.08, Research, Estimates), HP will gain No.1 worldwide positions in servers, PCs and hand-helds, plus imaging and printing. But until HP (HWP: down $4.34 to $18.87, Research, Estimates) works through its Compaq buy, the most obvious winners of the merger will be IBM and Dell, analysts said.
"Competition will intensify but IBM should be able to gain share as HP undergoes a Herculean integration task," Kraemer said, who said the combination will likely spark a wave of mergers for various hardware players.
Faced with flagging worldwide sales and a saturated market in the United States, computer makers in the first half of this year tried to stimulate demand by waging a bitter price war that has weighed heavily on all their profits.
But Dell Computer (DELL: up $0.93 to $22.31, Research, Estimates), currently the world's top supplier of personal computers, managed to gain market share in second quarter.
"This is the best possible scenario for Dell," said analyst Andrew Neff, a key technology analyst with Bear Stearns, referring to the HP-Compaq merger.
Neff predicted back in January that HP and Compaq would merge and at that time, he recommended that Dell or Compaq buy IBM's PC business and for Gateway to look for acquirers.
But now that HP is combining with Compaq, Neff thinks Dell should take the opportunity to gain market share. "Compaq will change their name to HP and every Compaq customer will be up for grabs, so this is to Dell's benefit," he said.
Most analysts view the $25 billion stock merger negatively Monday. The HP-Compaq combination will merge two companies with largely overlapping products which will result in cuts, said analyst Martin Reynolds of Gartner Dataquest.
"We don't see the benefits of this merger," he said. "Both will struggle to get this thing to grow."
Both Dell and IBM can feed off the uncertainty created by the HP-Compaq merger, where customers will be unsure what products lines HP will keep. Dell and IBM will look to pitch the security of their product lines and gain customers, Reynolds said.
"For Dell and IBM, the HP-Compaq merger is a win," Reynolds of Gartner Dataquest.
Dell shares surged nearly 7 percent Monday while IBM (IBM: up $1.54 to $101.49, Research, Estimates) gained nearly three percent.
A professional services buy
In the short term, Dell should hold off on any acquisition plans, Bear Stearn's Neff said. But Dell, the world's top supplier of personal computers, may have to answer if HP and Compaq do succeed in their tie up, providing everything from front end solutions to cheap PCs.
Dell, in its own bid to also emulate IBM, will then be looking to buy a professional services firm, said analyst Brett Miller of A.G. Edwards & Sons Inc.
Last year, HP called off its plans to buy PricewaterhouseCoopers but Dell may now be interested in the Big 5 firm. Accenture, the former Andersen Consulting, may also be a potential buy.
"Dell is doing a pretty good job on their own but in the long term they have to acquire a professional services organization," Miller said. "On the high end, they really do need a consulting firm to be a major player."
Overseas
Consolidation of PC hardware makers will likely take place overseas, rather than in the United States, analysts said. And Japan will likely be the center of such mergers.
Sony Corp., Toshiba Corp., NEC Corp., and Fujitsu are facing issues similar to their U.S. rivals. "They were not doing well in the worldwide markets," said Reynolds of Gartner Dataquest. "They were being forced out by HP and Compaq."
But like their U.S. competitors, the merger of HP with Compaq will create opportunity for PC makers overseas.
Sun Microsystems will also try to gain share from confusion in the server and enterprise space. But Sun may have to add to its services capabilities because of the HP-Compaq merger, said Merrill's Kraemer.
A united HP/Compaq will also put pressure on EMC in the storage product line, Kraemer said.
HP-Compaq have less of a clear storage strategy for the combined company, said Bear Stearn's Neff. "[The merger] is better at the margin for EMC and Sun," he said.
"Everyone but the people involved with HP-Compaq seem to win, doesn't it?" quipped Gartner's Reynolds.
Where goes Gateway?
Last week, Gateway Inc. announced it would cut thousands of jobs and post a loss in the third quarter as it continues to feel the effect of a drop in PC demand and falling prices.
In January, Bear Stearn's Neff recommended that Gateway (GTW: down $0.05 to $8.92, Research, Estimates) look for acquirers. But the San Diego-based PC maker is probably not attractive now as a takeover target, he said.
"They are a fairly small player in a consolidating industry," Neff said. "Don't see acquisition of them [in the] near term."
Shares for Gateway gained more than three percent Monday in afternoon trading. 
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