HP Buys Compaq: Another One Bites The Dust

by , 10:00 AM EDT, September 4th, 2001

Andrew Neff finally called one right. During the holiday weekend, HP and Compaq announced that HP was buying the slightly smaller Compaq. The deal is being valued as a US$25 billion stock deal, and the combined companies had sales of US$87 billion during each of their last completed 12 month cycles. This was one of the things recommended by Bear Stearns analyst Andrew Neff for the computer industry on January 17th of this year, the same time he recommended that Apple switch from the PowerPC to Intel.

For its part, HP's CEO, Carly Fiorina calls Compaq and HP two complementary companies. From A C|Net report:

"This is a decisive move that accelerates our strategy and positions us to win by offering even greater value to our customers and partners," Fiorina said in a statement. "In addition to the clear strategic benefits of combining two highly complementary organizations and product families, we can create substantial shareowner value through significant cost-structure improvements and access to new growth opportunities."

In reality, the two companies actually have enormous overlap in their businesses:

HP's buyout of Compaq will be fraught with difficulty, according to Ashok Kumar, an analyst at US Bancorp. The two companies are very much alike. Roughly one-third of HP's revenue comes from PCs, notebooks and servers. About half of Compaq's earnings come from the same sources. Their Unix server businesses are similar. Layoffs were expected, Kumar added. Both companies are being squeezed financially in nearly all of their markets.

"There are so many overlapping units there is no complementary benefit," he said. "The problem with HP is that they have a lot to deal with and if they want to get Compaq, it is going to be really tough."

There is no indication as of this writing on whether or not the Compaq name will be continued, but the combined companies will be called HP. US$87 billion in annual sales will place the newly formed HP as the #2 PC maker, just US$3 billion behind IBM's US$90 billion. It also places HP well ahead of the new #3 maker, Dell. Dell had annual sales of US$33 billion last year. There is more information in the C|Net article we referenced.

The Mac Observer Spin:

Wowza, this is pretty big news that will have an impact on Apple at some point or another. First, let's deal with the merger itself; it should help HP compete with Dell's far superior build-to-order manufacturing process. That said, it will also probably be the downfall of Ms. Fiorina's term at the helm of HP. Companies like these seldom make it when they merge, and we have the evidence of Compaq's own buyout of Digital Equipment in 1998. That merger did little more than to distract Compaq's CEO from the job of running Compaq's PC business, and the result was that Dell passed them up in the consumer and corporate market. Compaq has been sliding ever since. On the other hand, HP will probably handle Compaq's Unix and enterprise-oriented businesses far better than did Compaq itself. HP has done fairly well in this space for years. Still, our prognosis is that HP will be a US$60 billion a year company within 12 months, and not a US$87billion a year company. The combined companies will see sales in their PC businesses cannibalized by each other, and it's not going to be pretty.

What's this mean for Apple? We are about to see a large quantity of capacity disappear from the market one way or another. This will slow the commodification process of the industry to one degree or another. That in turn will mean a tad less pricing pressure on Apple as the company struggles to retain its margins. Mega-mergers are seldom good for consumers, and this one won't be any different.

Lastly, we stand by our assertions that Andrew Neff knows nothing about Apple.

We have a discussion about whether or not this merger will impact Apple in our forums.