HP/Compaq deal likely to get close legal scrutiny

The pending merger of Compaq Computer Corp. and Hewlett-Packard Co. is expected to face intense scrutiny here and in Europe and involve an examination of the competitive effect on product lines ranging from desktops to high-end servers, legal experts said today.

"It's too big of a merger for them [the Justice Department] to simply give it an automatic pass," said Robert Litan, a former deputy assistant attorney general in the U.S. Department of Justice's antitrust division who is now at Brookings Institution in Washington. "They are going to have to take a deeper look at this."

The main issue in the U.S. and in Europe, said Litan and other legal experts, will be deciding how to slice and dice servers by market -- Intel-based vs. Unix-based servers or low-end vs. high-end servers -- and then determining whether the merger creates a dominance in any of these markets.

"The key test is a test of dominance -- whether or not a deal creates a dominant position," said Amelia Torres, a spokeswoman for the European Commission in Brussels. Because of the size of the merger, it faces automatic EC review under its guidelines.

But dominance isn't easily defined, because there is no percentage share that automatically triggers alarms.

"There is no threshold," said Torres. "It depends on the sectors; it depends on the competitive structure of the market."

In Western Europe, a combined HP/Compaq would give the new company 24 percent of the PC market as measured by units, followed by Fujitsu Siemens at 11 percent, according to IDC analysts in London. In the Intel-based server market, the merged firms would have 52 percent of the European market by revenue, with IBM the next largest, at 16 percent. In non-Intel servers, including mainframes, IBM has 30 percent, and HP/Compaq would have 29 percent.

One of two agencies will review the merger in the U.S.: the Justice Department or the Federal Trade Commission, and U.S. officials could raise issues with specific markets.

"Once a firm operates in multiple markets, the government can challenge a merger in one market or in any group of markets that it wants," said Herb Hovenkamp, an antitrust expert who works as a law professor at the University of Iowa in Iowa City. "And it frequently approves a merger, but only on the condition that the firms divest some part of their business."

Some end users in Europe, however, say a combined HP and Compaq will put competitive pressure on IBM.

"The European authorities have no power to refuse it," said Michel Eechout, executive director of technology at Delhaize Group in Brussels, an international food retail group that owns Food Lion in the U.S. He believes the merger will reduce cost "because the economies of scale will be bigger."

But Eechout said the merger could hurt service. "Service is not something you can improve by increasing the size," he said.

The merger "will make them a better competitor to IBM, which could have some impact on both products and price," said Francois Dumas, director of IT infrastructure and planning at market research firm ACNielsen Corp. in Amsterdam.

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