PCs

Analyst: HP should price Gateway

Under the right circumstances, HP might seek to buy Gateway, according to speculation in a new report.
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By John G. Spooner
Staff Writer, CNET News.com

Could Hewlett-Packard, under new leadership, buy rival Gateway? At least one analyst is entertaining the idea.

In a report issued Friday morning, Andrew Neff, an analyst with Bear Stearns, predicted that under the right circumstances, HP might seek to purchase Gateway.

Several things would have to fall in line for HP to make a move. The computer giant has to replace ousted CEO Carly Fiorina. Second, that replacement would have to move to spin off HP's PC business, Neff wrote in his report. But by combining its PC business with Gateway's, No. 2 Hewlett-Packard would gain greater scale, thus getting a boost in its efforts to compete against rival Dell.

HP, which has struggled to increase its PC shipments as quickly as Dell in recent quarters, ousted Fiorina on Wednesday. However, Bob Wayman, HP's chief financial officer and interim CEO, said at the time that his company doesn't intend to alter its fundamental structure, suggesting that radical measures such as spinning off the PC business won't come in the short term, while it searches for a new chief executive.

Nonetheless, Neff wrote, "If the new CEO decides to get out of the PC business, our prediction is that a Gateway-HP combination is the most likely outcome."

Consolidation has been no stranger to the PC industry in the last few years, and some analysts believe that even more could be on the way, as unit shipment growth rates are forecast to slow after 2005. HP bought Compaq in May 2002; Gateway bought eMachines in March 2004; and IBM plans to sell its PC business to China's Lenovo Group this year.

During the same period, Dell has grown to become the world's top PC manufacturer. Dell finished 2004 with a market share of 17.9 percent, versus No. 2 HP's 15.8 percent and third-place IBM's 5.9 percent, according to IDC.

"Using similar reasoning that led us to predict the Compaq-HP merger (i.e., not a great idea, but Compaq had to do something and HP was the only viable buyer), we think that a Gateway combination with HP's PC operations could be the next industry consolidation move--although the timing will need to wait for new management to settle in at HPQ," Neff wrote in the report.

Representatives of Gateway and HP wouldn't comment on the speculation.

"We're focused on our strategy of being a leading provider of high-quality, high-value PCs for professional customers and consumers, which we believe is the right direction for our customers, shareholders and employees," said David Hallisey, a Gateway spokesman.

HP spokesman Robert Sherbin declined to comment.

Gateway bought eMachines for the very same reason Neff suggests HP might pursue Gateway: scale. Gateway, which tapped eMachines' CEO, Wayne Inouye, as its chief executive, aimed to lower its costs and increase its PC unit sales through the acquisition. It also sought new channels to sell those PCs through, using the deal to close its own store chain and enter the third-party retail market in the United States. It also has begun to expand internationally again.

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