Think About An HP-Dell Merger

Includes: DELL, HPQ
by: Dana Blankenhorn

A decade ago Hewlett-Packard (NYSE:HPQ) acquired Compaq because CEO Carly Fiorina saw a consolidating industry and wanted a dominant position in it.

It was one of the dumbest decisions in the history of corporate America. HP bought decades' worth of obsolete technology, the products of Compaq's own acquisition spree.

Now, after a decade of chopping-and-changing, however, it may be time for HP to consider a similar move, and merge with Dell (NASDAQ:DELL).

The aim this time would not be consolidation. It would be acquiring the heft to become a cloud leader, and the time to become a device player.

Between them, HP and Dell had about $190 billion in sales over the last year. Combined, however, their operating cash flow came to $15 billion last year. Both are increasing their debt loads alarmingly, however, and combining assets may be the only way to stop that bleeding long enough to become competitive again.

There is no doubt that the two companies have complementary product lines. Dell has made a go out of the services business HP couldn't make work, but HP's Autonomy software is better than anything Dell's bought. Combined, the two companies may be able to wring good-enough deals from suppliers and Chinese OEMs to remain price competitive. Both are building global networked clouds under the OpenStack system pioneered by Rackspace (NYSE:RAX), but neither can realistically afford to buy RAX at this point - the rot has gone on too long.

What is holding this up are issues of control and leadership. Dell's leadership is mediocre, but frankly HP's leadership stinks. The company that emerges from this should be based in Austin, not Palo Alto, but unfortunately that's not what their relative sizes are saying - HP is still twice as big as Dell. Despite all its mismanagement HP is actually up 20% in value over the last 10 years, while Dell has lost over 60% of its market value.

But with the PC business continuing to spud into the ocean - HP is in the process of losing its industry leadership to China's Lenovo - with both these companies down over 40% this year alone, and with capital expenditures absolutely essential to seize new opportunities, the unthinkable may soon become obvious.

What was done a decade ago for dominance may now need to be done for survival.

If you believe this story makes some sense, buy DELL. They're more likely to be taken out, and thus they will command a premium over current prices.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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