Merger Expected to Get Salute

Regulation; Weak economy may bless HP, Compaq union

Like relatives trying to steer a couple away from what they fear will be a doomed marriage, investors and analysts have strongly urged Hewlett-Packard Co. and Compaq Computer Corp. to back out of their proposed merger.

Yet the corporate couple remains undeterred and is now seeking the blessing from whats normally a skeptical authority but one that, in this case, might prove more understanding: the U.S. government.

In fact, several antitrust experts believe HP and Compaq will likely have little trouble winning over U.S. regulators, in part because the merged companies would still have limited power to influence markets. In addition, with a recession looming, regulators will be wary of doing anything to increase economic uncertainty.

"Even if this is seen as two major market players joining forces, there are certainly other major names out there that can reposition themselves and compete effectively against them," said Kevin Arquit, an antitrust attorney with Clifford Chance Rogers & Wells LLP, in New York.

And while regulators would likely deny it, Arquit said, the reality is that the weak state of the computer industry in particular and the economy in general will likely deter them from sinking the deal.

"When the economy is in the state that its in, there may be a tendency for regulators to give more of the benefit of the doubt," Arquit said.

Other experts agreed, saying that while regulators will likely conduct an exhaustive review over the next six months or so, in the end, theyll give their blessing.

Last month, HP Chairman and CEO Carly Fiorina and Compaq Chairman Michael Capellas stunned industry watchers when they announced that the boards of directors at both companies had agreed to HPs plans to buy Houston-based Compaq in a stock deal initially valued at $25 billion.

Investors and industry analysts overwhelmingly rejected the move, saying they saw few synergies from the pairing of two companies with similar product lines and fearing the merger would create an unwieldy bureaucracy of more than 130,000 employees spread across more than 160 countries.

Investors voiced their objections the loudest as a stock sell-off sent shares of both companies falling to multiyear lows. As a result, the value of the deal plunged and was estimated to be worth about $16 billion as of last week.

But those issues are of little concern to U.S. regulators, antitrust experts say. The Federal Trade Commission, which is reviewing the deal, will instead focus on whether the pairing would create a threatening industry player with power to influence markets. The government will likely focus on the companies respective PC businesses, where the merged companies could hold a strong position.

"The one major overlap is obviously in the PC area, but their overall market share is still so low that I doubt the government will have a prohibition on them merging together," said John Soma, a law professor at the University of Denver and a member of the Department of Justices antitrust team that litigated against IBM in the 1970s.

According to market research company Gartner Dataquest, in San Jose, Calif., HP and Compaq garnered about 18 percent of the worldwide PC market based on units sold during the second quarter of this year, which would make the merged companies the top PC vendor. Dell Computer Corp., of Round Rock, Texas, which currently holds the No. 1 spot, had a 13.1 percent market share.

But while the melding of HP, of Palo Alto, Calif., and Compaq would create the worlds largest PC vendor, their combined holdings would still account for less than a fifth of the market. In comparison, Intel Corp. owns about 80 percent of the microprocessor market. Rather than creating a behemoth that could exert monopoly control, Gartner analyst Todd Kort said the merger will likely benefit competitors.

"I think Dell, and IBM to maybe an even greater extent, will experience some gains as a result of this," Kort said. Compaq customers uncertain about the companys future will abandon the PC maker for other competitors, he said.

But one potential stumbling block is that U.S. regulators may be uncomfortable with HP and Compaqs potential dominance in the retail market, where the companies account for more than 50 percent of sales at U.S. stores, said Hillard Sterling, an antitrust expert with Gordon and Glickson LLC, in Chicago.

"There would be significant market power and concentration in the retail area," Sterling said. "Its certain that some restructurings or divestitures would be necessary."

But a representative of the Consumer Federation of America, which lobbies the U.S. government to enforce antitrust measures, said the merger wouldnt give HP and Compaq the kind of feared industry control that can result in higher PC prices.

"It does not strike me as a concentrated market," said Mark Cooper, an antitrust expert at the CFA, in Washington, who has led many of the groups efforts in condemning the business practices of Microsoft Corp. "The PC industry, historically, has demonstrated extremely competitive characteristics. This is not the cable industry."

Analyst Roger Kay, of International Data Corp., in Framingham, Mass., agreed, citing the presence of not only other large U.S. and foreign-based PC makers, but also the much smaller white-box makers. Besides, Kay said, HP and Compaq will likely consolidate their product lines, eliminating overlaps such as the Compaq Presario and HP Pavilion, which will likely result in the loss of customers.