Dell Coming Out on Top in HP, CPQ Merger?

Both Hewlett-Packard Co. and Compaq Computer Corp. slid slightly in mid-day trading Tuesday as the market took stock of the companies’ plans to merge. But while HP found its stock down 12.5 percent at noon and Compaq stock was down 2.4 percent, Dell Computer Corp. surged ahead 6.8 percent.

Analysts appear to be cautious about the $25 billion merger, which will create the world’s largest PC manufacturer with revenues of $87.4 billion. According to Gartner Dataquest, Compaq is currently the second largest PC manufacturer while HP is fourth. In worldwide server sales, Compaq takes the top slot and HP is fourth. But while the companies contend that the merger will give them an edge in competing with rivals like IBM and Sun Microsystems for business computers, analysts are questioning whether a combined company under the Hewlett-Packard moniker will be able to overcome differing business models, brand confusion and a sluggish market for PCs.

But while those questions linger, analysts also appear to feel that Dell, which would be unseated as top dog in the worldwide PC market by the combined company, would benefit from industry consolidation.

“Given the uncertainties and integration issues surrounding the merger of Compaq and HWP, we think that Dell benefits from this consolidation,” said Andrew Neff, an analyst with Bear Stearns, in a research note. Bear Stearns upgraded Dell from “attractive” to “buy” on news of the planned HP-Compaq merger. “We see it in a superior position to emerge a winner from the ongoing price war and consolidation with its cost leadership and a direct model.”

He added that Dell is “positioned to benefit from industry consolidation and could see its market share gains accelerate as Hewlett and Compaq work to integrate operations and brands.”

Meanwhile, HP and Compaq Tuesday projected cost savings of $2.5 billion by mid-fiscal 2004, resulting from the elimination of overlaps and redundancies. Part of that savings will be in the form of 15,000 jobs, which the two companies expect to shed within a year or two of the merger’s completion. HP also said it expects the merger to give earnings a 20 percent boost by 2003.

However, before that can happen, regulators are likely to put their fingers in the pie. The European Union’s competition watchdog, the European Commission — which already shot down a proposed merger between American industrial giants GE and Honeywell earlier this year — said Tuesday that it plans to investigate the merger. American regulators are sure to be close behind.

Should the deal overcome antitrust hurdles, the two companies expect to close the merger in the first half of 2002.

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