HP and Compaq Stay PC

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In tech-land, the big post-Labor Day news — that computer maker Hewlett Packard had made firm plans to purchase alter-ego Compaq for $25 billion in stock (only the regulators stand in the way, and they likely won’t) was met with decidedly little enthusiasm. Indeed, that kind of M&A action in a season like this came at first blush a bit of a shock, at least in these quarters. Just last month Barron’s made a cover-story plea to HP CEO-ess Carly Fiorina to ditch her PC business and stick to peripherals; her response was to buy an entire PC maker?

But the model for this sort of thing isn't strategic, business-complementing mergers like, say, AOL and Time Warner (parent company of this writer) but commodities-driven, misery-loves-company marriages of scale like Exxon-Mobil.

Remember that one? What was then the biggest merger in history came at a bleak time for the industry; oil prices were staggeringly low and those two titans of the drilling-and-pumping game got together to create some of those vaunted efficiencies of scale, allowing redundancy elimination and other cost-cuttings that would allow the new behemoth to squeeze extra drops of profit out of the barren times and position itself for when things got flush again.

Now, a personal computer, or even its silicon heart the semi-conductor chip, is not a commodity by any strict economic definition, but the way PC prices have been falling, falling, falling all year the lesson of commodities behemoths like Exxon must not have been lost on Fiorina and friends.

To wit: the companies said the merger is expected to eventually save $2.5 billion a year, with about three-quarters of those savings coming from staff cuts totaling about 15,000 jobs (on top of the15,000 job cuts the two companies have already separately announced this year). And HP Chief Financial Officer Robert Wayman, added that the deal will hurt earnings slightly in the first quarter after its completion, and then add to profit per share thereafter.

Thus slenderized, the new company will now try to take on Dell in the PC game, even as that profit pie shrinks along with demand and list prices, and also IBM and Sun in the higher-end, higher-margin server-and-services sector. Instead of giving up and bailing out on any one part of the computer business, the new HP way is to try to be a one-stop shop for everything under the computing sun.

"It doesn't make sense to get out of that business," Fiorina told analysts recently. "It's an important part of the solutions bundle. But don't think we didn't look at it (getting out of PC sales) carefully. We did."

That few businesses are doing any computing shopping of any kind right now in this Icarian tech slowdown apparently did not faze Fiorina a bit. Nor did the popular perception that the PC itself is well down a slow but discernible path to extinction. (Though it certainly was responsible for Wall Street’s collective yawn at the news.) After all, somebody has to sell people their desktops until that Terminator-style brain-implant chip comes along, and nobody at HP much wants it to be Dell.

The verdict here

At the very least, Fiorina gets points for smart shopping — it’s certainly an acquisitor’s market for stock-swaps. At Friday’s closing stock prices, HP is paying an historically anemic 19 percent premium to Compaq shareholders, and yet these days they’ve got to feel lucky to get that. Because that 19 percent premium is coming at a time when Compaq shares are languishing in the low teens, well below the $30 level it bade goodbye a year ago and its January-1999 high of $50. HP, meanwhile, is skimming $20 after nearing $70 last summer. Buy low, baby — and whenever possible pay with your own depressed stock.

Shackled to PC prices, Hewlett-Packard was sputtering and Compaq was crumbling. The combination of the two doesn’t do much new to help the new HP break into IBM and Sun’s domain. But there doesn’t seem to be any harm in trying again with twice the muscle.