HP/COMPAQ: Mega merger could influence PC prices

A new computer colossus looms: The combined Hewlett-Packard Co. and Compaq Computer Corp.

Should you care?

For consumers, the impact may not be immediate, analysts say. The long-range impact, however, could mean fewer choices and higher prices the next time you shop for a PC or a handheld computer.

Carly Fiorina, current HP chief executive officer and future chief of the new merged company, says the company's success depends in large part on its ability to serve large corporations -- not consumers.

However, Michael Capellas, chairman and CEO at Compaq and future president of the combined company, is quick to point out that consumers will remain an important part of the company's focus.

"We are clearly going to remain the product of choice for consumers. We will continue to innovate for consumers whether it be digital handhelds, next-generation wireless devices, or imaging products, and digital music," Capellas says.

Capellas was short on specifics, however, regarding the fate of Compaq's Presario brand PCs and its iPaq line of handheld computers, which compete directly with HP brands -- particularly in retail.

Retail behemoth emerges

One thing is clear about the merger, according to Roger Kay, analyst with market research firm IDC.

"What's created is a retail behemoth," Kay says.

Together, the two firms will dominate the retail channel in front of Apple Computers, eMachine, and Sony Computers. In the short run, however, consumers won't see a major shift in focus by HP.

Kay says it may take years for the merger dust to settle. The likely result is fewer Compaq and HP brands at the low end.

"Both their product portfolios are very similar. HP can't afford to support both," he says.

Chief among redundant brands are HP's Pavilion and Compaq's Presario lines of consumer PCs and HP's Jornada and Compaq's iPaq handheld computers.

Mark Margevicius, research analyst with Gartner, expects Compaq's brand to exit retail shelves and become HP's business-class PC. HP-labeled PCs will likely be pushed as the consumer brand, he says.

Unfortunately for consumers, the likely result of fewer competitors in the market is flat or rising PC prices, says IDC analyst Anne Bui.

With fewer choices on retail shelves the next time you go shopping for a PC you may find less choice and higher prices, she says.

Poor Service, Too?

Another area to watch: product quality and customer service.

HP's services could nosedive if the merger doesn't go as planned, says Bob Sutherland, analyst with Technology Business Research. Sutherland, like many other experts, is scratching his head trying to figure out why HP wants to buy Compaq, given the similarities between the two companies.

If HP can't turn itself around fiscally then customers will feel the impact of a struggling firm in the form of diminished customer satisfaction and weak technology.

"The merger won't help if HP continues to loose money," Sutherland says.

Impact on Competition

HP's assimilation of Compaq will have little if any impact on its competitors, say analysts.

"Dell is going to continue to set the price standard and Hewlett-Packard and others are still going to have to compete," says Stephen Lane, analyst with the Aberdeen Group.

"As long as PCs are a commodity, companies will compete on price," He says.

In the short term, competitors such as Dell and IBM will be "gleeful" as HP is distracted by the arduous task of digesting Compaq.

PC Industry Sings the Blues

Compaq lost $279 million in its most recent quarter. Meanwhile HP's profits are down 89 percent from a year ago. Obviously, executives hope the combined company will be in a better position to compete and find profits.

Currently HP is the world's number three PC maker; Compaq is number two. Executives say the combination will be bigger than Dell Computer and IBM.

A merged HP and Compaq will hold a dominant share in the server, printer, and storage markets. HP will also claim a staggering 70 percent of the consumer PC market in the United States, according to Bancorp Piper Jaffray.

Sutherland says it's unclear how HP plans to cut enough costs to compete with the ultra-efficient Dell. The company has already said it will lay off 15,000 employees --10 percent of its combined workforce.

The merger is occurring at a turbulent crossroads in the computer industry. PC shipments are down across the world, according to IDC. PC shipments fell 8.1 percent from a year earlier and dropped 1.3 percent from the first quarter of 2001. Analysts point to a saturated PC market and slumping worldwide economy as key reasons for the decrease.

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