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Technology Stocks : Hewlett-Packard (HPQ) -- Ignore unavailable to you. Want to Upgrade?

To: Elwood P. Dowd who wrote (454)	5/17/2002 9:30:12 AM
From: Elwood P. Dowd	Read Replies (1) \| Respond to of 4345

Merrill on ink by: skeptically 05/17/02 09:23 am Msg: 133918 of 133921 From a note on Lexmark FlashNote Photography & Electronic Imaging 16 May 2002 Shannon S. Cross Director Marisha L. Clinton Industry Analyst Lexmark International EU Probes Activity in Printer Ink Cartridge Market NEUTRAL Long Term STRONG BUY Reason for Report: Industry Update • On May 15, European Union Competition Commissioner Mario Monti announced that the EU is investigating possible anticompetitive behavior by printer manufacturers with regards to cloned or aftermarket cartridges, especially inkjet cartridges. We believe the investigation may have implications for Hewlett Packard, Lexmark, Epson (a private Japanese company) and Canon (followed by our Japanese Imaging Analyst Richard Kaye). These four companies are the dominant players in Europe’s $11 billion printer ink market with 44%, 10%, 25% and 18% respective European market shares. • According to the EU announcement, the probe may include possible antitrust violations by printer manufacturers based on the high cost of inkjet cartridges and the use of sensors by some manufacturers in order to detect and reject cartridges made by independent suppliers. The European Commission said the probe was sparked by consumer complaints regarding the high price of inkjet and laser printer cartridges. • Lexmark inkjet and laser print cartridges utilize proprietary circuitry and design. Lexmark patents it’s inkjet cartridges and utilizes designs whereby the print head is fused to the ink reservoir to prevent duplicating. Due to the design (HP also utilizes a design which makes it more difficult for others to clone the cartridges), patenting and the potential use of senors (we are still investigating which companies are utilizing the sensors), the only alternatives to purchasing manufacturer specific cartridges are refill kits (using a syringe at home) and remanufactured cartridges (reused cartridges that are refilled by an aftermarket supplier). • We believe the EU investigation will focus on inkjet printers which are geared toward the consumer market and possibly the use of “prefilled” laser cartridges (focused on the business market). In terms of the magnitude of impact to Lexmark and HP, we estimate that 33% of HP’s printer revenue comes from consumer (primarily inkjet) versus 67% for business (primarily laser), while Lexmark’s revenue is virtually split 50/50 between business and consumer. European sales comprise approximately 30% of revenue for both HP and Lexmark. • We expect the investigation to take several months, however, we are looking into specific timetables. Based on our preliminary research, we believe the potential impacts of a proven case of anti-competition are: (1) an EU fine of up to 10% of sales, and (2) potential loss of market share and margins if impediments to the utilization of aftermarket products are lessened. We do not expect the investigation to have any near-term impacts, however, we do caution that negative press coverage could cause short-term volatility in the stocks.