With Hewlett-Packard's (NYSE: HPQ) announcement that it's considering dumping its Personal Systems Group, or PC business, Dell (Nasdaq: DELL) investors should be saying, "play it again Sam," in the PC market share wars.
Dell and its competitors benefited when IBM (NYSE: IBM) announced in 2004 that it was selling its PC group to Lenovo, creating disruption in the marketplace. Before that was Hewlett-Packard's controversial megamerger with Compaq.
In both cases, Dell initially came out a winner amid confusion in the marketplace. And for Dell investors, that could bode well after the company announced earlier that it needed to lower its revenue forecast for its fiscal year due to uncertainty in the economy.
Following the megamerger HP-Compaq deal in 2002, Dell posted a 20% increase in worldwide shipments to reclaim its No. 1 spot in the third quarter of 2002, while HP's orders slowed. And shortly after the IBM-Lenovo deal closed, Lenovo's PC market share dipped to 7.7% in the third quarter of 2005, from 8% a year earlier, while Dell grew its share to 18% in the quarter from a 17.9% slice a year ago.
It stands to reason that Dell investors will be the winners as HP's corporate and consumer buyers become a little leery about making PC purchases from the world's largest vendor, who is contemplating an exit from the market.
That has some market analysts, like Richard Kugele of Needham, bumping up their recommendations to a "buy" from a "hold," with the expectation that Dell will be able to increase its current market share of roughly 12% to a higher level in the next 12 to 18 months, while HP's 18% share is expected to drop.
The timing of HP's announcement comes as back-to-school shoppers are winding up their purchases and consumers in the next couple of months will be heading in droves to retail stores online and offline to snap up holiday gifts -- including computers, tablets, and mobile phones.
Deciding whether to make a purchase from a computer maker that doesn't know if it plans to still be selling and supporting the device months and months from now is a big weight on consumers' minds.
With an estimated 70% of HP's PC business coming from the consumer market, Dell would be smart to cherry-pick a portion of that base to bolster its consumer slice, which accounts for roughly a third of its PC sales.
The Texas computer maker should make a land grab for customers most likely to buy HP's higher-margin PC gamer computers and its highly configured notebooks, leaving its low-margin slash-and-burn priced TouchPad tablets and Palm phones alone.
Dell, after all, has had an abysmal performance in the tablet market and, rightly so, hasn't gone out of its way to do a huge marketing push for its Streak tablets or mobile phones. But in all fairness, tablet competitors like Motorola Mobility's (NYSE: MMI) Xoom and Research In Motion's (Nasdaq: RIMM) PlayBook have failed to emerge from the shadow of Apple's (Nasdaq: AAPL) iPad.
For Dell, its biggest benefit will come from landing HP's commercial and small-business customers, given that segment accounts for roughly 70% of Dell's business. But the trick for Dell will be luring HP customers who are used to sales through third-party resellers, verses Dell's direct sales system.
"Two years ago, Dell contemplated developing a channel but after thinking about [it] decided they'd be better off on their own," says Louis Miscioscia, a Collins Stewart analyst.
Too bad, such a strategy would have come in handy going after HP sales had they ventured out, even though it takes skillful balancing of third-party partners' needs and having a direct sales team hungry to land deals.
In the meantime, Dell will likely have time to milk the uncertainty surrounding HP's PC plans for months. Miscioscia, for one, expects it to take at least two or three months for any interested party to kick the tires and perform the due diligence on HP's PC books, then add to that the time needed for the new buyer to integrate HP's PC business. All of this could bode well for Dell and potentially return it to its No. 1 slot in the PC kingdom.
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