SAN FRANCISCO — Investors pummeled the shares of computer giants Hewlett-Packard Co. and Compaq Computer Corp. on Tuesday, a swift and harsh reaction to a proposed merger that begins the long-awaited consolidation of the nation's technology industry.
HP shares fell 19% and Compaq's 10%, unusually large drops that reflected deep pessimism on Wall Street about whether the merger can create a strong competitor to deal with the troubled future facing the technology sector.
Despite the chilly reception, the $21-billion acquisition of Houston-based Compaq by Palo Alto-based Hewlett-Packard could be the catalyst that reshapes the industry into far fewer and larger players, experts said.
The technology industry's rapid and unprecedented growth came to an abrupt end last year, resulting in an 18-month free fall that created a choking overcapacity in manufacturing. The conditions are prime for a retrenchment that would consume jobs and destroy stock wealth, but that would set the stage for a healthy future, according to securities analysts and industry experts.
Monday's announcement that two of the biggest and best-known names in this once-thriving business are joining forces represents a watershed event for the industry. Experts say technology is facing the same kind of historic pressures long seen in the so-called old-economy industries such as aerospace, autos and steel.
Lockheed Corp.'s acquisition of Martin Marietta Corp. in 1995 added fuel to a massive consolidation in the aerospace business, a once-unthinkable trend in an industry that was responsible for the security and defense of the U.S. The Chrysler-Daimler merger in 1998 led to a domino effect that reduced the number of independent auto makers.
"We're heading for the automobile model in the personal computer market--it's a mature industry," said Fred Hickey, editor of the High-Tech Strategist, an investment newsletter in Nashua, N.H. "That sort of market can only support a very small number of players."
With the exception of the telecommunications sector, there simply haven't been any gee-whiz deals of the size or scope of the HP-Compaq combination. That could soon change.
Several large hardware and software companies are so weakened by the market downturn that they could become prime acquisition targets for technology giants such as Cisco Systems Inc. or IBM Corp., which combine hardware with a wide range of software and services, said Rob Enderle, a technology analyst with Giga Information Group.
