Europe gives thumbs-up to HP-Compaq

European regulators approve the pending mega-merger between the computing heavyweights. Will U.S. regulators follow suit?

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
5 min read
European regulators on Thursday approved the pending mega-merger between Hewlett-Packard and Compaq Computer, leaving industry watchers to ponder whether U.S. regulators will follow suit.

After only about a month of reviewing the matter, the European Commission gave the deal a pat on the back, imposing no conditions and saying that neither competitors nor consumers would be harmed.

"A careful analysis of the merger, the largest ever in the information-technology sector, and of the competitive forces in the markets concerned has shown that HP would not be in a position to increase prices and that consumers would continue to benefit from sufficient choice and innovation," the EC stated.

In the PC market, European regulators found that the merged company would still face strong competition from such rivals as IBM, Dell Computer and Fujitsu-Siemens.

"With the absence of significant barriers to entry and the practice of non-exclusive contractual relationships between retailers and manufacturers, (this) would prevent the new HP from any attempt to raise prices significantly," the EC said.

With this latest decision, the European Commission has tempered its growing reputation for taking a tougher stance than U.S. government agencies such as the Federal Trade Commission and the Department of Justice on high-profile technology deals that raise worries about threats to competition. But antitrust attorneys say there's no guarantee that the commission's ruling on the HP-Compaq merger will sway a federal vote.

"The EC and (U.S. Department of Justice) do talk to each other a lot, but they may not reach the same conclusions," said Bill Young, an antitrust attorney with Hunton & Williams in Washington, D.C. "The two agencies have taken different views in the past. Just last year, the (U.S. Department of Justice) approved the Honeywell and General Electric merger, but the EC rejected it."

Last year, the commission blocked GE's $43 billion bid to acquire Honeywell, despite earlier approval from U.S. regulators. And in the Microsoft antitrust case, the U.S. Department of Justice and a number of state attorneys general late last year reached a settlement with the software giant, while the European agency expanded its investigation into whether Microsoft used its monopoly in operating systems to gain market share in server software.

Young noted that the commission tends to review antitrust cases for their potential effect on competitors, while the FTC usually focuses on the implications for consumers.

The decision was a shot in the arm for HP's leader, and she was quick to bask in the approval.

"We are extremely pleased with the EU's decision," Carly Fiorina, HP's chief executive, said in a statement. "We see it as an encouraging step in the continuing process of satisfying regulators worldwide that this deal will provide a real stimulus for competition in information-technology markets."

More votes still to come
Compaq spokesman Arch Currid said the companies expect to receive a decision from the United States and other countries around the globe, such as Australia, by the end of February.

"Today's decision marks an important step toward final regulatory approval," he said, "but we still have several steps to go."

With the European decision now behind them, HP and Compaq are also moving toward a shareholder vote in March--which may prove their biggest obstacle yet.

see special coverage: Big iron: HP to buy Compaq

The two companies announced their intention to merge in September. Wall Street and industry analysts largely frowned on the deal in the first days and weeks after the announcement, and more recently some of the fiercest opposition has come from the children of HP's founders, who are influential shareholders. Lately, however, the companies have said that some large institutional shareholders are showing signs of warming to the merger.

Walter Hewlett, a dissident HP board member and shareholder and son of co-founder William Hewlett, is waging a battle to get shareholders to vote against the deal, saying it would give the company a greater presence in the low-margin PC business, while diluting its highly profitable printing and imaging operations.

"We understand that HP's rivals raised almost no objections to the proposed merger, helping it to gain EC approval," Hewlett said in a statement. "We are not surprised; we believe Dell, Sun Microsystems and IBM must be delighted at the prospect of a merger that would so greatly distract and damage two of their rivals."

The European decision should come as no surprise to HP executives. In the weeks leading up to Thursday's deadline for the commission to respond to the merger, the European regulators did not ask the company to divest of any of its businesses, said a source familiar with HP. The source added that HP executives were surprised that the regulators had not made such a request in the weeks and days leading up to the deadline.

Competitive concerns
The European regulators looked at the potential effects that a newly merged HP would have on the markets for PCs, servers, handheld products, printers, storage hardware and services. They also considered potential antitrust issues regarding HP's joint development efforts with Intel on the Itanium processor.

"In view of the presence of strong existing and potential competition in all markets considered," the regulators said in a statement, "the commission concluded that the operation will not result in the creation or strengthening of any dominant position, and has decided not to oppose the concentration."

Although the commission said the merger would not result in a dominant position for HP, the company is hoping to achieve something like dominance by evolving to be a significant rival to IBM. HP has said the merger would give it a greater presence in the enterprise computing and consulting markets, allowing it to become a one-stop shop for corporate customers.

"We have no comment on the EC's feelings that the merger would not create a dominant position," said Currid. "Their decision was that they felt it would not raise any significant competition in Europe."

Fierce competition in the PC arena helped HP in its efforts to win over regulators. Dell, for example, has been on a tear in Europe, indicating that the historical tendency among Europeans to shop in stores or buy local brands is fading. In the third quarter of last year, Dell's Pan-European market share grew from 10 percent to 12 percent, according to figures presented by Jim Schneider, Dell's chief financial officer, at the BofA Securities Conference this week.

In the United Kingdom, Dell is the top seller, with 18 percent of the market. It's No. 4 both in Germany (with a 7 percent share) and France (9 percent), and it's ranked 10th in Italy. Although some European sales go to U.S. Fortune 500 companies with offices in Europe, Dell has penetrated the indigenous business and consumer markets, Schneider said.

The commission did find that the merger would give HP a "relatively high market share" in the European entry-level server market, but it noted that intense competition and an ever-changing and growing market would eliminate antitrust concerns.

HP's pending merger is also not expected give the combined company an anti-competitive edge in the European market for printers--a business that HP has found to be quite lucrative--given "the merged entity's moderate share of the relevant PC market and the limited impact that joint PC/printer sales could have on the new HP's printer market share," the commission said.

And in regard to the Itanium processor, the regulators found that it was in HP and Intel's best interest to guarantee competitors unrestricted access to the components.