Compaq May Be Better Off Alone, Analysts Say
Compaq Computer Corp. could thrive catering to large corporations instead of consumers, but would face significant challenges amid the technology industry’s worst downturn, analysts said Friday.
The proposed merger between Compaq and Hewlett-Packard Co. became less probable Friday after a foundation controlled by descendants of HP co-founder David Packard voted against the merger. The children of co-founder William Hewlett also oppose the deal.
Publicly, Compaq insisted it remains committed to the union. “We’re still focused on completing this merger,” spokesman Arch Currid said.
Privately, though, Compaq executives have acknowledged that the company has contingency plans should the merger fall apart.
Some analysts said the company--the nation’s second-largest personal computer maker--would be better off alone.
“I actually think this is good news for Compaq in the long term,” said Rob Enderle, a research fellow with Giga Information Group in Santa Clara, Calif.
“Now the company has a chance to define its destiny. They have a chance to compete....They can compete with Dell and the others. The question is, will they?”
Since the merger was proposed in September, Compaq was viewed as the weaker partner. Much of the opposition to the deal stemmed from fears that Compaq’s low-margin PC business would weaken HP.
Compaq lost $499 million in its most recent quarter as sales dropped 33%, down from a $557-million profit the previous year.
Compaq shares slumped $1.31 to $10.01 and HP surged $1.62 to $25.14 in after-hours trading after the vote by the Packard Foundation. Nonetheless, Tim Bajarin, president of consulting firm Creative Strategies in Campbell, Calif., said Compaq has a fair chance of pulling out of the current slump in PC sales if it focuses on high-end servers and technology services for corporations.
“Compaq can survive, but they’re going to have to refocus the company,” Bajarin said.
“I think that where Compaq is making their money, and will continue to, is in the area of services. That means systems integration, customization and a certain level of hand-holding. They would still have that business no matter what.”
Compaq booked 35% of its $7.5-billion third-quarter revenue from servers and storage and 20% from services. The rest--about 45%--came from sales of PCs and hand-held computers, such as the iPaq personal digital assistant. Until it was unseated by Dell this year, Compaq was the nation’s largest PC maker.
Dell holds 13.8% of the U.S. personal computer market. Compaq has 10.4%. HP is fourth at 6.4%, after IBM’s 6.6%.
The personal computer business, however, is facing its worst slump in history as consumers and businesses put off upgrading in the face of recession.
In addition, ruthless price competition has hammered profits at all the major computer manufacturers.
“These are commodity products, and these vendors hate it,” said Kenneth Greene, founder of the Campus Computing Project, which studies the use and purchase of computers in higher education. “Because in a commodity environment, where the boxes are perceived as identical, if there’s a $2 difference, people save the $2.”
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Times staff writer Jon Healey contributed to this report.
