December 11, 2001 03:08
Analysts Say Compaq Needs New Plan if Hewlett-Packard Merger Fails to Happen
By Crayton Harrison, The Dallas Morning News
Dec. 11--Under its planned merger with Hewlett-Packard Co., Compaq Computer Corp.'s brand of PCs was supposed to disappear from store shelves.
But even if the merger doesn't go through -- an increasingly likely scenario because of shareholder opposition -- Compaq should consider making its PCs vanish, analysts said.
The computer business, facing its first year of declining sales since 1986, isn't generally profitable right now. Houston-based Compaq could improve its income by dropping PCs completely or at least finding ways to make them more profitable, said Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray in Minneapolis.
"The PC segment is eating their lunch," Mr. Kumar said. "It's a replacement business and a low-cost-provider business."
The company would do better to keep shifting to technology services and concentrating on the server market, said Vadim Zlotnikov, senior technology analyst at Sanford C. Bernstein in New York.
"They will need to beef up their services organization," Mr. Zlotnikov said. "And I don't want to characterize servers as a panacea, but there's more room for innovation in servers than desktop computers."
PC prices have been falling all year, so if Compaq doesn't rid itself of PCs, it needs to determine how it can make the business profitable, said Rob Enderle, an analyst at Giga Information Group in Santa Clara, Calif.
Compaq could make money on PCs by restructuring its operations to respond better to changes in the market and allow employees to make more day-to-day decisions, much like the company's cross-state rival, Austin-based Dell Computer Corp., Mr. Enderle said.
"Compaq has to become much more fast on its feet," he said. "People in Dell jobs can make decisions without forming committees."
Compaq has to battle the perception that it's a failing company. If it doesn't, customers won't buy products because they don't think the company will be around to support them, Mr. Enderle said.
"Job No. 1 is to create a campaign that makes Compaq look trendy, like a feisty up-and-comer and a viable alternative to Dell," he said.
Compaq might be wise to call off the merger itself, said Don Young, an analyst at UBS Warburg in New York, in a research note. Either company has to pay the other a $675 million break-up free if it decides to cancel the merger. But Compaq could do it to show customers it's confident it can survive on its own, Mr. Young said.
Compaq shares fell $1.62 to close at $9.71, while H-P dropped 52 cents to close at $23 on the New York Stock Exchange.
Both Compaq and H-P have said they intend to bring the merger to a shareholder vote sometime in the first quarter of 2002, after regulatory reviews of the deal are expected to be complete. The companies said they still back the deal even after Friday's announcement that H-P's largest shareholder, the David & Lucile Packard Foundation, plans to vote against it.
Influential shareholders representing about 18 percent of Hewlett-Packard's ownership have said they'll vote against the deal, but a majority would be needed to block it.
Compaq and H-P are still discussing the benefits of the merger with other shareholders and advisors, including Institutional Shareholder Services, a Maryland-based adviser that counsels owners of about 10 to 15 percent of H-P's shares, said Compaq spokesman Arch Currid.
"Hopefully as we approach the shareholder vote early next year, we can clearly communicate the long-term shareholder and customer upside of this deal till we get the majority of votes in favor," Mr. Currid said.
Compaq isn't talking publicly about what it might do if the deal falls through, Mr. Currid said.
"It's really not productive to talk about alternatives when we really are convinced this is the right direction to take the company," he said.
But Compaq had better make a move, because if the merger fails, no one else is going to buy the company, Mr. Kumar said.
"I don't think anybody is going to step up to the plate to buy Compaq," he said. "So Compaq has to figure out what it wants to be when it grows up.
"It really puts into perspective the phrase, `Houston, we have a problem.'"
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