Compaq vs. Gateway: Divergent stocks, divergent Net strategies

Compaq and Gateway don't agree on much. Gateway is mostly a direct seller and Compaq relies on resellers. Gateway is expected to report strong earnings and Compaq isn't. Now Gateway reportedly wants to be a big-time Internet player. And Compaq is ready to exit the portal game.

The struggling Compaq Computer Corp. (NYSE: CPQ) is planning to sell AltaVista, and other internet holdings to Internet investment company CMGI Inc. (Nasdaq: CMGI). Gateway Inc. (NYSE: GTW) may acquire the Internet service provider EarthLink Network Inc. (Nasdaq: ELNK), according to Wednesday reports in the Wall Street Journal.

Compaq fell 3/8 to 23 7/16, and CMGI was up 1/16 to 95 in morning trading. Gateway was down 3/4 to 64, while Earthlink bounded up 10 percent, adding 6 13/16 up to 63 7/16.

If the deals go through, the two divergent Internet moves could be looked back on as a key turning point for both PC makers (comparison chart).

When, if common punditry has its way, PCs are given away for free, and Internet access and e-commerce become the money makers, PC manufacturers that have diversified will come out on top. If that free-PC movement pans out then the divergence between Compaq and Gateway will be pronounced.

Analysts: Compaq should divest Alta Vista

Nevertheless, analysts are supportive of Compaq's talks to dump Alta Vista. Though Compaq's potential decision to divest itself of Alta Vista, Shopping.com, and Zip2.com, included in the $2 to $3 billion deal doesn't exactly look progressive, it's "right on track with strategy", said Louis Mazzucchelli, analyst for Gerard Klauer Mattison & Co.

Mazzucchelli said he doesn't think the Internet strategies contradict each other, since Gateway is more consumer focused than the corporate Compaq. Mazzucchelli also points out Alta Vista is a portal, while Earthlink is an Internet service provider and the business models are very different.

"Alta Vista has been a distraction for Compaq," he said, speculating that the portal may have been impeding their e-commerce plans. "They may be selling at the top, and with that $2 billion, they could do other things." Though the money still doesn't change Compaq's outlook, he adds, which is "murkey."

Alex Cheung, portfolio manager of the Monument Internet Fund agreed that Compaq's potential sale of AltaVista would make sense because the PC maker didn't know how to handle a Net business. "Ultimately this is a good thing for Compaq," said Cheung. "It would free up capital and tension in the company."

Gateway + EarthLink = Problems?

Cheung said Gateway's potential bid for EarthLink could raise problems. "I'm not sure Gateway should run an ISP (Internet service provider)," he said. "They are two very different businesses and ISPs need a lot more in front-end investment."

Pasadena, California -based EarthLink , which competes with America Online Inc., (NYSE: AOL), is one of the fastest growing Internet service providers, having added 155,000 new members in its first quarter, to a total of 1.15 million. Shares are rocketing on the rumor that the company may be acquired. Its Wednesday trading price of 63 3/8 would put the company's market valuation around $1.9 billion.

An outright purchase of EarthLink would be complicated anyway, since telecommunications company Sprint Corp. (NYSE:FON) holds a 28 percent stake in the company, with the option to acquire it later.

Officials from all companies involved have declined to comment on the speculation.