When Microsoft (MSFT 0.50%) said it was considering a $1 billion to $3 billion investment in Dell's (DELL +0.00%) efforts to go private, the news was not well received by fellow PC makers, especially Hewlett-Packard (HPQ 1.03%). The Dow component, which is in the midst of CEO Meg Whitman's five-year turnaround plan, was the worst-performing stock in the Dow last year and could use some good news. Despite maintaining the spot as the top PC maker in the fourth quarter, the challenge coming from the tablet market is considerable. The views on the impact that the Dell-Microsoft union will have on HP are mixed, but ultimately this is another blow for investors.
Matchmaking mismatch?
Microsoft's involvement in Michael Dell and others' attempt to take Dell private has led to significant speculation as to the quality of the relationship that could develop between the two companies. While a certain number of challenges are expected, the general consensus is that the union would be able to achieve several important synergies that would bolster the position of each. Not only are there significant consumer advantages to be gained, but the enterprise-level synergies may have the greatest importance of all if the deal is able to proceed.
The deal has largely been compared to the acquisition of Motorola by Google (GOOG 0.29%) and some of the synergies achieved in that union. That transaction was an important step by Google to push further into the mobile arena and have a greater voice in controlling the quality of the products that were released featuring Android. Without needing to clamp down completely on Android-based devices, the knowledge that Google had the ability to bring its own competing devices to market may have been enough to push competitors to up their games. Motorola can focus on the high end of the Android device market and serve as a thought leader for others.
HP's place at the table
There have been widely mixed opinions of what impact the Dell-Microsoft deal will have on other PC makers. Many cite the parallels to the Google-Motorola union as evidence that a close relationship between a software maker and hardware manufacturers does not need to spell death for others in the space. Ronald Gruia of Frost & Sullivan said: "Microsoft shouldn't be perceived as favoring one hardware maker over another. That's the last thing Microsoft needs."
Research firm IDC recently reported that Samsung has extended its lead in terms of global smartphone market share, now accounting for 29% of the devices sold. Clearly the marriage between Google and Motorola has done very little to slow Samsung's ability to make highly coveted devices that are selling well. Many believe that the relationship between Microsoft and Dell should have little impact on Microsoft's relationship with other OEMs, including HP.
The other side of the argument is that, even in the absence of a clear preference by Microsoft for Dell products, HP needs more bad news like a proverbial hole in the head. Forrester's David Johnson thinks that if the deal closes, it "would also put significant pressure on HP, who is already reeling from years of board-level mismanagement." Whitman has asked investors to have faith and remain patient during the protracted turnaround plan. The concern is that more bad news could derail the benefit of the doubt that she may have garnered.
Whitman remains focused, however, understanding the importance of rolling out tablets and smartphones that can help the company compete in the market. In a recent interview with The Wall Street Journal's Alan Murray, she said, "We've got to deliver these fantastic sets of new mobility devices and we are all over this." She went on to say that the company is on target to become a disruptive force in several critical areas, including mobile, cloud computing and virtualization.
And the verdict is...
While there are cogent arguments to be made on both sides of the issue, when a company is sitting in as tenuous a position as HP seems to be, any news that is not clearly good should be seen as bad. I think there is a reasonable argument to be made that any collaboration between Dell and Microsoft will simply help to drive the industry and not specifically put pressure on HP, but that is far from a guarantee. This is a case where even the appearance of trouble may be the catalyst for actual trouble.
As we all know, uncertainty is a bearish force on a stock in the best of times. HP is undertaking a major overhaul that, as Whitman has requested, requires the faith and patience from shareholders. If the market starts asking if Microsoft and Dell are leaving the station without inviting HP, the stock could well be punished before all the facts come to light. While I like the changes going on at HP, this deal makes things more challenging, not less, and I would stay on the sidelines until there's more clarity.
