Now is the time for personal computer makers to take action or face years of disappointing results, according to Andrew Neff, Bear Stearns senior managing director and PC hardware analyst. Neff believes the PC industry is at a critical juncture and that management and investors need to recognize that the problem is slower growth and overcapacity. ``There are just too many players in the market right now and the demand cannot support all of them profitably,ii said Neff. ``The only way for many of these companies to reestablish shareholder value is to strengthen their position through acquisitions or to sell off business units that are under-performing.ii
In order for companies to survive, bold steps must be taken. Neff advises the key players to act now instead of waiting for the effects of consolidation. ``It is time to do it before it is done to you,ii said Neff. The following are the recommendations Neff has made to key players in the PC industry:
Dell Computer (DELL)--Buy Market Share: Purchase IBMis PC Business or Gateway
IBM (IBM)--Get out of the PC business, sell operations to Dell or Compaq and get a services deal
Hewlett-Packard (HWP)--Buy Compaq
Compaq Computer (CPQ)--Sell to Hewlett-Packard; pass on the IBM option
Gateway (GTW)--Retrench and sell to Dell or one of the Japanese PC players
Apple Computer (AAPL)--Drop PowerPC and go to Intel
The challenges of overcapacity are not unique to the PC industry. Several industries, such as airlines, autos, defense, pharmaceuticals, papers and others, have gone through the same growing pains and the result has usually been the same: consolidation has been the key to survival. According to Neff, PC makers need to eliminate overcapacity and increase demand and the best way to do that is with a smaller number of stronger players in the field.
The PC industry can learn lessons from the disk drive business, which also faced the challenges of overcapacity, according to Neff. ``The disk drive business denied consolidation for years, resulting in years of under-performance, aggravation and losses. The PC industry would be wise not to make the same mistake. The companies that recognize this early will get the best deal for their shareholders, and the companies that donit could find themselves trailing the pack.ii
Consolidation is indeed overdue on the PC sector, and there is little doubt that some of the advice given above will be taken by the major players at some point. We can hope, however, that their advice for Apple will go unheeded.
[Update] On CNBC, Mr. Neff explained that he felt Appleis industrial design was excellent, and that their products were good. However, he said that no one cares what kind of processor is in the machine, all they know is that Appleis machines languish at 1/3 to 1/2 the speed of everyone elseis. The implication being that this effects consumer sales.