Printers, servers sticking points in HP-Compaq merger

7:30 pm - By PETER GRIFFIN

Hewlett-Packard is looking to clear the way locally for its proposed merger with rival Compaq, claiming competition will not suffer despite market shares of the proposed merged entity being outside Commerce Commission guidelines.

A 70-page application presented to the Commerce Commission by Hewlett-Packard shows the merged company would end up with an impressive chunk of the overall IT market - but only run into competition issues in the printer market, the traditional domain of HP, and the server market where Compaq has been a strong player.

Under new safe harbour rules introduced last year, the big question on the Commission's mind is whether three firms in the IT sector have 70 per cent or more of a market segment. If that is the case, then the merged HP/Compaq could have no more than 20 per cent market share. If not, the merged entity would be allowed up to 40 per cent of the market.

The provisions would put the merged business over the limit in the printer market where HP's 40.4 per cent stake added to Compaq's 2.8 per cent share would give a total share of 43.2 per cent, according to IDC figures quoted throughout the application.

But HP claims that should not bar its way because Compaq only sells a small number of re-branded ink jet printers and will stop that if the merger proceeds.

"Given that Lexmark has announced that it will terminate its OEM agreement with Compaq post-merger, there will in fact be no lasting increase in market share," the application read.

The other sticking point is the server market where HP has 11.9 per cent of the market but Compaq holds 29.6 per cent, putting them over the 40 per cent threshold.

HP counters that the $US62.17 million market is becoming increasingly competitive.

"A clear and steady trend can be seen of Dell growing its share," the application read. "White box" manufacturers were also growing their share.

In the other four market sectors - PCs, handhelds, enterprise storage systems and the IT services market, the merged entity's market shares are within Commission guidelines.

The PC market, valued at $US420.3 million in the application, saw Compaq's number one spot equate to revenue-based market share of 22.6 per cent while HP had 12.4 per cent share.

That would give the merged company around 35 per cent of the entire market - a big jump on IBM, Dell and strong local assemblers like the PC Company.

In handhelds, HP with its Jornada range and Compaq with the popular iPaq had combined global market share of 12.6 per cent, and estimated the figure was even lower in New Zealand. The handheld market, said HP, was dominated by rival Palm and mobile phones.

The merger would not be dominant in IT services, despite both companies signalling the merger would give them greater strength in the services market against traditional heavyweight IBM.

HP held three per cent of the market and Compaq five per cent.

In the enterprise storage market, including CD and DVD sales through to server-based storage networks, the merged entity would have 39.4 per cent of the market where the three top players represented 58.8 per cent of the market.

The application process has involved Hewlett-Packard talking down market share and growth figures, in a move that goes against the grain for a computer heavyweight which studies each percentage shift in market share like a hawk.

Hewlett-Packard claims that "Compaq's share of the PC market increased by less than 2 per cent between 2000 and 2001 from 20.3 per cent to 22.1 per cent respectively."

While it described its potential partner as a "vigorous competitor", Compaq did "not fall within the category of a maverick or non-typical competitor".

That despite Compaq saying two weeks ago it had 11 per cent growth for 2001, in one of the worst years so far for PC vendors.

Hewlett-Packard shareholders are expected to vote on the merger on March 19, when members of the Hewlett and Packard families representing 18 per cent of HP shares are expected to oppose it.

The merger has already been cleared by the Eurpoean Union with the Federal Trade Commission expected to give the green light soon. Last week Hewlett-Packard delivered a first-quarter net profit of $US484 million which analysts believe will boost the chances of the merger going through.

Back in New Zealand it will be left to the Commission to decide whether in falling outside safe harbour guidelines a serious threat is posed to other competitors and potential new entrants.

HP seeks clearance to acquire Compaq