Merger reflects PC industry change

H-P CEO Carly Fiorina will remain at helm of the newly merged company

LONDON, England (CNN) -- The $25 billion Hewlett-Packard-Compaq merger is not only the computer industry's largest ever deal, it is also indicative of the changing nature of the market.

The merger, which CNN's business technology consultant Bruce Francis described as "an acquistion by Hewlett-Packard in all but name," creates the computer world's second largest company.

"It creates a powerhouse that is competitive with IBM," Andrew Robinson, a partner at tech-sector consultancy DiamondCluster International, told CNN.

"From a PC-sector perspective we now have the number one PC company in the world that is absolutely going to be competitive with Dell."

The deal, which is likely to provoke intense scrutiny by competition authorities, comes at a time of great change for the computer industry.

The PC market, after years of high-flying, has gone into recession. Global PC sales for the second quarter of the year fell for the first time since 1986, while analysts are predicting that the market will shrink by a further 10 percent in the coming financial year.

"It's definitely the end of the PC market as an expanding industry," David Buik of spreadbetting company Cantor Index told CNN.

"It's a market that's got hopeless overcapacity with computers stacked up in warehouses."

At the same time computer companies are increasingly focusing on the lucrative server market.

Servers are, essentially, large computers at the centre of most computer networks, providing the information, files, Web pages, and other services to which the client logs on.

According to CNN's Richard Quest "the future is clearly in the growth of these machines," a statement with which Buik agrees.

"The server is the area that people should be looking to develop and steal a march on the competition," he says.

The global services sector, too, is one to which leading computer companies are devoting more and more energy. IBM, for instance, sold $33 billion (£23 billion) worth of computer services last year alone.

"This (global services) is a very lucrative area for computer companies," says Bruce Francis. "Helping other companies figure out how best to use their technology, and how to put all the disparate and rather complex parts of their technology needs together."

Seismic industry changes

The Hewlett-Packard-Compaq merger must be seen in the light of these seismic changes in the shape of the computer industry.

So far as the PC market goes, most analysts agree that the deal was vital for both companies.

Michael Capellas, CEO of Compaq

"I think at one level they had to merge," says Robinson. "It's indicative of the fact that you have two players who individually don't have a very strong position.

"Hewlett-Packard had actively been looking for acquisitions for some time and quite honestly it was clear they were going to do something big."

The merger will, according to Robinson, allow the new company to effect "economies of scale" and develop a more effective business structure along the lines of rival PC-manufacturer Dell.

"The PC market is a razor-thin business," he says. "It's not just about cost cutting, it's about business model transformation. A company like Dell has a very advanced model and that is something HP and Compaq are going to have to migrate towards."

The need to establish a strong position in the server and global services market also provided a strong incentive for the companies to merge.

"Everybody is focussing on the PC business," says Robinson, "But we should remember that Hewlett-Packard-Compaq is a $90 billion (£62.1 billion) business and PCs only account for $30 billion (£21 billion) of that."

By merging both companies believe they will be able to enjoy greater dominance of the market.

"This is what the deal is really about," says Quest. "Both companies already have considerable presence in the server market. Together they believe they can more effectively compete with the giants like IBM."

Robinson agrees. "It (the merger) was based on the desire to have more influence in the services and server market."

And what about the average punter on the street? How will the monster deal affect them?

Hewlett-Packard headquarters in Palo Alto, California

While it seems likely that the increased competition created by the merger will drive prices down in the server and services market, Robinson is not convinced the same will happen when it comes to PCs.

Here, he believes, rather than heralding a new era for the consumer, the new era has already arrived, and Hewlett-Packard and Compaq are merely playing catch up.

"My sense is that a new dawn has already broken," he says. "We're already getting very good prices and entry-level access to unbelievably powerful computers.

"It's not like a year from now the H-P merger is going to create another substantial reduction in prices. I think we're already there."