Heady Growth Over, PC Makers Poised to Consolidate
By Nicole Volpe and Peter Henderson
NEW YORK/SAN FRANCISCO (Reuters) - As personal computer makers wage a price war to get consumers buying, the companies may soon be forced to put themselves up for sale -- or risk becoming as outdated as last year's iMac.
Whether through mergers or a slow death for the PC makers that bleed market share, analysts and investment bankers said the industry is poised for consolidation as it comes to terms with slowing growth and maturity.
``Keep in mind that the PC industry has gone from all of them making money in December, to today -- Gateway's losing money, Apple's losing money, H-P's losing money,'' said Bear Stearns analyst Andrew Neff. ``You don't think their boards (of directors) are getting a little antsy?''
``No company admits it is for sale,'' he said. ``Is something going to happen? The answer is yes, something is going to happen.''
The tech-heavy Nasdaq market is now at less than half its value a year ago, when it hit a lifetime high of 5132.52 on March 10. The stock prices of personal computer makers have been hit particularly hard, as the onetime high-growth sector is now considered an area of slower growth.
PC makers will need to bulk up to survive, said Kevin McClelland, principal at Broadview International, a high-tech advisory firm specializing in mergers and acquisitions.
``Consolidation deals are certainly those that people are looking at,'' McClelland said.
``When you look at what makes a PC company successful, it's all about scale,'' he said from the company's Foster City, Calif., office. ``In a retrenching market, you do see some consolidation in the need for scale.''
Limited Growth Prospects
Widespread PC ownership makes for limited growth prospects in the United States, raising the stakes for companies that will have to take customers from their rivals to grow. Dell Computer Corp.(NasdaqNM:DELL - news) and Gateway Inc.(NYSE:GTW - news) in particular have been cutting prices.
Some may sell out under pressure, but others may be squeezed out before they know what hit them, said Martin Reynolds, PC analyst at market researcher Gartner Dataquest.
``Sometimes these companies disappear surprisingly quickly,'' he said. ``They keep pretending the blue bird is around the corner, they are just about to get big orders, but in practice they just run it into the dirt.''
It might also be cheaper to out-market competitors than buy them, he added.
PC makers have become marketing outfits, tied to their individual brands, who hire contract manufacturers to build their boxes, said Phil Hage, senior vice president of the Wireless Technology Group at Wells Fargo Van Kasper.
So big PC brand names would see little of the manufacturing synergies that typically drive consolidation, he said. ``It (consolidation) could only come about if someone stumbles and one of the other guys wants to pick up their brand name.''
Many also question what is a fair price for a company in the current market. Shares of Gateway, frequently mentioned as a potential target, have bounced between $15.45 and $71 in the last eight months, for instance.
``The fundamentals are really up in the air,'' said David Popowitz, managing director of mergers and acquisitions with Credit Suisse First Boston in Palo Alto, Calif.
Mergers Are An Option
Yet, analysts said, mergers may be one option under consideration for PC makers that clearly are under a lot of pressure.
Neff said disk drive industry consolidation over the past couple of decades was a model for the PC industry.
But investment banker Afsaneh Naimollah, a managing partner at Chela Technology Partners in New York who worked on disk drive industry mergers, said questions of branding were a crucial distinction between the sectors.
``The disk drive industry was a heavily, heavily consolidated industry. The reason for that was basically that brand doesn't matter in that industry. It is an intermediate group,'' she said.
The last acquisition of one PC company by another was early in 1998, when Compaq bought Digital Equipment Corp. for more than $9 billion.
Among PC makers, Dell is seen likely to survive the current crisis, but has only bought one firm ever, ConvergeNet in 1999, and has yet to offer a product based on that deal.
``Dell actually has been very negative about doing acquisitions as a strategy,'' said Michael Kwatinetz, a managing partner at San Francisco-based investment fund Azure Capital and former Wall Street financial analyst with Credit Suisse First Boston.
Others suggested Dell, the No. 2 PC maker, look at acquisitions that would help it continue to branch out into higher-end, and higher-margin, back-office computers that run Web sites and corporate networks rather than buy PC market share.
``They have to be the McDonald's of the computer industry -- where they have a chicken sandwich, a fish sandwich and a hamburger,'' said Michael Beeghley, president and founder of Atlanta-based Applied Economics, which handles smaller merger and acquisition deals in technology.
Apple Computer Inc.(NasdaqNM:AAPL - news), with its own operating system and an International Business Machines Corp. (NYSE:IBM - news) microchip, would be a tough match with firms using Intel Corp.(NasdaqNM:INTC - news) chips and Microsoft Corp.'s (NasdaqNM:MSFT - news) Windows operating system, said Kwatinetz.
But network computer maker Sun Microsystems Inc. (NasdaqNM:SUNW - news) might be interested, he and others said.
``Apple has got that sort of a unique nichy workstation-type aura to it. They would be a good complement to Sun as a Sun segment. Depends how cheap they are,'' Reynolds said.
THE POST-PC ERA?
Reynolds added that IBM, which quit selling PCs to consumers through U.S. retail channels a year ago, could exit the business PC market as well.
``IBM could potentially spin off or unload its PC division,'' said Reynolds, who listed Dell, Compaq Computer Corp.(NYSE:CPQ - news) and Hewlett-Packard Co.(NYSE:HWP - news) as potential buyers. ``I would put first bet on Dell and offer some space to Compaq.''
The IBM PC division only recently returned to a profit, and Wall Street analysts have said that IBM should just declare victory and get out of PCs altogether. Neff pointed to IBM's annual report in which Chief Executive Louis Gerstner said the PC era was over.
``Why is he in the PC business?'' Neff asked.
But Gateway, which is squarely set in the troubled U.S. consumer PC market, was the most likely acquisition target, analysts and bankers said.
``If either Compaq or Hewlett wanted to improve their ability to go direct, Gateway certainly has a lot of things in place,'' Kwatinetz said.
Japanese companies, Japanese-German joint venture Fujitsu Siemens Computer (6702.T) (SIEGn.DE) and Taiwan's Acer Inc. (2306.TW) were seen as potential partners or buyers for Gateway, analysts said.
``I think the highest probability would be the Japanese, and not Sony,'' said Neff. Sony Corp.'s (6758.T) U.S. distribution network might conflict with Gateway's more than 300 Country Store showrooms.
Toshiba Corp. (6502.T) and NEC (6701.T) could be buyers, he said. ``(They) have been dying to get into the US market.''
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