Not sure if this was mentioned:
Computers & Technology IBM May Be Vulnerable In Compaq Deal's Wake
[Investors Business Daily, 917 words]
Computers & Technology IBM May Be Vulnerable In Compaq Deal's Wake
Investors Business Daily, Wednesday, February 18, 1998 at 13:48
Compaq Computer Corp. has put IBM Corp. on notice with its plans
to purchase Digital Equipment Corp. Compaq's message: We're gaining
on you, Big Blue.
Houston-based Compaq has been the top maker of personal computers.
Digital, in Maynard, Mass., is a force in systems integration and
computer services. Separately, the companies only have nipped at the
heels of titan IBM.
The $9 billion merger - due to become final later this year - may
change all that. Together, Compaq and Digital can attack IBM both in
PCs and customer services, analysts say. Compaq's acquisition last
year of Tandem Computers Inc. means the company will also compete
with IBM in large-scale computer systems.
Compaq-Digital still would be the No. 3 computing company in the
U.S., with $37.6 billion in combined sales for fiscal '97, well
behind IBM's $78.5 billion. No. 2 Hewlett-Packard Co. had $42.9
billion in sales.
But Armonk, N.Y.-based IBM has a number of areas where it's
vulnerable, analysts say. IBM's weakest link is PCs in general, and
consumer machines in particular. Last fall, IBM missed the hot sub-
$1,000 computer market while Compaq rode in first with the low-cost
machines.
"IBM didn't react correctly to pricing actions and just didn't
understand the market," said John Brown, an analyst with
International Data Corp. in Framingham, Mass. "You wait a week in
the consumer market and you're burnt."
IBM executives tell a different story. They say sub-$1,000
machines made by Compaq, Hewlett-Packard and Dell Computer Corp. were
"artificially configured" to hit that price level.
They point out the rival machines had lowerquality components,
could not be upgraded and had limited memory.
"It's like buying a Ford Mustang without seats, a transmission,
heater or trunk space," said James Bartlett, vice president of
marketing for IBM's consumer PC, the Aptiva. "If we were (going to
be) late for the party, we said let's be the best dressed."
So last November, IBM released the Aptiva E16 for $999, several
months after the rest of the pack. Bartlett says the processor
speeds are the same. But the machine does have a faster CD-ROM
drive, more- advanced graphics chips, twice the expansion slots and
more memory.
Analysts say the Aptiva move helped IBM's standing in consumer
PCs, although not by much.
"They had a little rebound in the U.S. in (the fourth quarter) on
the consumer side," Brown said. "Still, the growth wasn't anything
to cheer about."
Some analysts remain unfazed by IBM's lackluster PC performance.
They say personal computers aren't Big Blue's core business.
"IBM has come under a lot of criticism for the performance of its
PC group, and it's clear that the company lost market share in PCs in
'97," said Bill Milton, an analyst with Brown Brothers Harriman in
New York. "But IBM is not a consumer company. Its strength in PCs
has been on the corporate side."
Many companies are focusing efforts on commercial PCs because
that's where the dollars are made. Case in point is direct marketer
Gateway 2000 Inc. in North Sioux City, S.D. Gateway specializes in
consumer machines, but now it's trying to break into the corporate
game.
Beyond personal computers, though, the Compaq acquisition aims to
dig into IBM's stronghold in services. IBM's global services
division, powered by 18% growth that led to $5.9 billion in sales in
'97's fourth quarter, now comprises one-fourth of the company's
revenue.
IBM is known for its ability to hand-hold companies through
technology purchases. Many companies' information technology
specialists still follow the age-old adage that they won't get fired
for buying IBM.
"Corporations are more accustomed to buying from a company like
IBM," said John Jones of Salomon Smith Barney.
But analysts say some of those businesses may change their tune,
and soon buy from a company like Compaq. By adding Digital, Compaq
now has the breadth of product line and the sort of highlevel
consulting operations that big corporate computer users demand.
Compaq never was recognized for that before.
"Frequently, we weren't invited to the party," Compaq CEO Eckhard
Pfeiffer said in a press conference after the merger last week. "Now
Compaq can provide service and support capability that is a
prerequisite for most of our major customers."
Digital ranks third in corporate services with $6.2 billion in
revenue, IDC says. IBM leads with $22.9 billion, followed by
Electronic Data Systems Corp. with $10.2 billion. Nearly half of
Digital's revenue currently comes from its services operation, which
helps businesses set up computer systems and networks.
IBM officials see obstacles in the new Compaq's path.
Steve Ward, general manager of the division that makes IBM's
laptop PC, the ThinkPad, says it will be tough to integrate two large
companies.
"There is a good chance that Compaq will spend a lot of time
trying to figure out how to assimilate all they will acquire from
Digital," Ward said. "Their actions show they need to achieve the
kind of thing we've been building for a while with our partners that
is, partners who provide an entire end-to-end solution for the
customer."
But analysts argue the new Compaq may capitalize on one element -
IBM's complicated sales approach.
Compaq is the leaner company and is likely to pitch a less
complicated program to customers, says Rob Enderle, a senior analyst
with Giga Information Group in Santa Clara, Calif. IBM is known for
offering choices - perhaps too many - for customers to sift through,
"This creates complexity for the client," Enderle said. "Those
choices for a potential buyer can force IBM out of the bidding." |
