investmenttool.com Cover Story

A Whale eats a pig

HP announced this Tuesday plans to purchase Compaq Computer. This is both and admission of failure and a virtual guarantee that Dell Computer will maintain its pre-eminence in the computer industry. There could hardly be a worse strategy than the one that HP has adopted. Two failing mammoth giants, both fallen from former glory are trying to digest each other, hoping the resulting combination will form an powerhouse capable of taking on IBM. Not.

Compaq has fallen from a position as the largest maker of computers to a distant number two. Dell computer continues to eat into their share of the market by producing better computers at a better price. Dell has challenged Compaq's lead in the PC server market the same way. It is possible to get equally capable machines for thousands less. Dell's cost advantage of their build to order system has them gaining market share rapidly, even in today's weak demand environment.

Compaq itself is a good example of why this merger strategy is doomed to fail. Compaq purchased Digital Equipment Corporation in 1998. Though sales and profits rose after the integration, Compaq's management eventually drove off Digital's engineering talent. Difficulties integrating the overlapping profit lines eventually made the $ 8 billion merger a failure by any measure. It was really a liquidation of DEC's already weakening business.

Hewlett-Packard is one of the most trusted vendors of high margin Unix servers. Their proprietary HP-UX operating system sets the standard for others to meet. With Oracle's Internet Application Server and their top line Superdome computer, a record for transaction processing was set in the lab.

Hewlett-Packard has an excellent reputation for customer service and has gained a lot of market share in the PC business. They have yet to figure out how to make money in the PC business, since they are still mired with Compaq in the retail computer business.

There is no chance that machines using Compaq's True64 Unix will start using HP-UX or vice versa.

The problems with this merger is that its going to take three years to digest and integrate Compaq, which can be described as a bloated pig in corporate terms. By the time this process is complete, many of Compaq's lines of business will probably have withered away.

Though on paper, this makes the combined firm larger in PC unit volume that Dell, by the time it takes to digest Compaq, Dell will probably have regained its lead.

The market by pounding both stock prices and leaving a hefty premium in Compaq shares based on the deal provision has made a statement. This is a merger that should not happen.

For our front page, click here.

Shmuel Protter
investmenttool.com

Send this page to a friend

Friends Email (Required):
Your Email (Required)    :
Your Name (Required)    :

Enter your message to your friend (optional):

Return Email receipt: Yes No
Join Stockwatch Alert Mailing list: Yes No

---

Join Stockwatch Alert mailing list.

---

---