The long-held belief among this country's leading personal computer makers that they're each uniquely lovable has finally begun to crack with
$25 billion acquisition of
Investors are bracing for more consolidation, although some market pros say you're better off waiting to see where the chips fall.
The marriage of Compaq and Hewlett-Packard, the No. 2 and No. 3 players in the market, could generate more takeover targets -- or hopes of targets at least. The industry has been mired in a dramatic price war for most of the year, as the economy slows and demand for new PCs dwindles. In a note issued this morning, Merrill Lynch said it expects the merger to spark consolidation among the hardware players, something that "has been needed for some time."
Technology stocks were higher across the board today, but the tracking indices for the PC sector were relatively quiet. The
Philadelphia Stock Exchange Computer Box Maker Index
was up only 0.3%, and the
Dow Jones U.S. Computers Index
was gaining 0.7%.
were up following the announcement.
rose 2.3% to $102.31. Gateway, which has seen its sales and margins erode in the last year, pushing its stock below $10, is probably the most logical takeover target of the remaining independents. The major PC makers have for years essentially been clones, using the same
operating system and many of the same hardware components in their machines.
, which was up 1.5% to $18.82, is the only major U.S. computer maker with a proprietary operating system.
But strategists pointed out that trying to guess which companies are acquisition targets and which ones are going to do the acquiring can be tough. The rewards may not be that great anyway in such a beaten down market: Compaq agreed to sell at a premium of 19% to its Friday closing price of $12.35. That would value each share of Compaq at about $14.70. The 52-week high is $33.37.
"Everyone is going to say, look at what Carly Fiorina did, the next ones have to do it," said Thomas McManus, market strategist at Banc of America Securities. "That's typically what happens when there is a gauntlet like that. Suddenly people expect everyone will be an acquiree. Then they realize that some might be acquirers."
Compaq was up on the news earlier in the session. But lately, the stock traded down 4.4% to $11.80 -- after touching a 52-week low of $11.65 around midday.
Meanwhile, industry consolidation is historically a lot better for consumers than it is for shareholders, according to McManus.
"Look at airlines," he said. "Regulation fanned a wave of consolidation in the '90s, which was good for the consumer, but bad for the shareholder. It should just hasten the commoditization of the PC business."
Tracy Herrick, market strategist at Jeffries, urged investors to avoid the need to gamble on the sector. "This is not an easy market to work in," he said. "It's really better to wait for the announcement rather than try to guess. In a difficult market like this, you're taking on a lot of risk."
Of course, Compaq shareholders waited. And they don't seem to be terribly happy with what they got.