August 2, 2002 2:34 PM PDT
Analyst: Apple to lie down with Intel
Intense competition, softening demand, excess capacity and the fact that virtually every technology company shows some sort of exposed vulnerability will likely prompt a rash of changes in the market, according to Neff in the latest version of his "PC manifesto," a detailed report on the state of the market.
"The key for investors to is to realize that this isn't a game where companies die and simply go away," Neff wrote. "In reality, this is a rare occurrence. We believe it is a time for company managements to take steps toward concrete changes, as those that recognize the need for action first will get the best deals...The point being, there is no easy way out."
Neff's predictions in the 50-page report vary depending on the circumstances in which the companies find themselves.
Neff, for instance, predicted Apple, which uses chips from Motorola and IBM that currently top out at 1GHz, will switch to Intel, whose chips run at 2.5GHz, to get a performance boost and gain more customers. There's a better than 80 percent chance Apple will make the jump in two to four years, he said.
For its part, IBM is following a potentially profitable path by increasing its services business, but it will need to further de-emphasize hardware--a path the company already appears to be taking. In January, it shifted factories to Sanmina-SCI.
"We're not saying that IBM will ever exit hardware; but it is clearly de-emphasizing commodity hardware through its relative lack of investments," Neff wrote.
However, IBM is in the best position possible in the server and general business market because it can offer nearly any service or hardware a large organization would need.
To combat IBM, rivals Dell, Sun and EMC could forge tighter bonds with each other in an alliance that could combine their strengths. Although the historical record for alliances isn't great, these arrangements don't involve the gut-wrenching reorganizations and gargantuan costs of mergers.
The possibility of a Dell-Sun-EMC triumvirate coming into existence could in turn prompt HP to buy EMC. The merger would strengthen HP in storage and deprive Dell of its closest ally.
Meanwhile, Dell remains the king of the PC world because of its low-cost manufacturing abilities, but it will have to increase its participation in the market for high-end servers and storage devices.
In this environment for desktops and notebooks, Dell will win, Neff noted. Dell's dominance is so clear that the company's main rivals for PC profits aren't other computer makers, but suppliers such as Microsoft and Intel. If tensions arise between these historically close allies, Dell could find itself talking more to Linux providers and to AMD.
HP, meanwhile, has problems in the PC realm. Rather than try to become a low-cost leader, the company instead tried to bulk up by buying Compaq Computer. History in the computer market, though, shows that "the key is not scale, the key is low cost," he said in an interview.
HP can offer a broad array of services and technology, but the company's girth, achieved through mergers, makes it less stable. Often, companies that grow through mergers vacillate between quarters heavy in restructuring losses and quarters showing revenue growth obtained mostly through merger accounting. Ultimately, these strategies fail.
"The numbers can work for some time through serial restructuring, but those combinations usually mask the underlying challenges of consolidation and sub-optimal economy," he wrote.
While Wall Street analysts have created a cottage industry out of making grandiose (and often ultimately incorrect) predictions and recommendations, Neff can boast of a fairly strong track record of the industry adopting at least some of his ideas.
In January 2001, he said that it would behoove HP to purchase Compaq. At the time, most analysts--and even some HP and Compaq execs--warned against buying PC companies, saying it was better to let them fade away. Around the same time, Neff also said that it would make sense for Dell and EMC to link up.
Months after the report, HP announced it was buying Compaq, while Dell and EMC forged a complex alliance that is leading to co-branded storage systems and cooperative sales and manufacturing ventures. (Neff, though, also recommended in the same reports that Dell buy IBM's PC division or Gateway or both.)
(Bear Stearns owns shares in Dell and Intel, and has a banking relationship with HP and Dell.)