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Analyst urges PC overhaul
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January 17, 2001: 2:57 p.m. ET
Wall Street analyst's 'manifesto' calls for radical changes in the industry
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NEW YORK (CNNfn) - Saying that the personal computer industry is at a critical stage and on the verge of market saturation, a key technology analyst is calling on American PC vendors to take drastic actions in the interests of their shareholders.
In a six-page report titled "The PC Industry: A Manifesto for Change," Bear Stearns analyst Andrew Neff said that unless PC makers take immediate steps to consolidate, their stocks will continue to deteriorate.
"This is an industry that needs some consolidation," Neff said in an interview with CNNfn.com. "There are some structural issues that need to be addressed."
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The rash of quarterly profit warnings from the major PC vendors in recent weeks underscored the overcapacity problems that many of them are facing. Weakening demand for their products is leaving them with too many computers and not enough customers, which this year has led to dramatic price cuts and underperformance in their stocks.
 Comparing the PC industry to other mature industries such as the airline, automobile and pharmaceutical industries, Neff is recommending that the leading PC vendors such as Compaq (CPQ: Research, Estimates), Dell (DELL: Research, Estimates), IBM (IBM: Research, Estimates) and Hewlett-Packard (HWP: Research, Estimates), "take concrete steps toward consolidation."
Specifically, Neff, among other things, is calling on:
- IBM to sell its PC business to Dell or Compaq;
- HP to buy Compaq;
- Gateway to begin looking for acquirers, including Japanese companies;
- Apple to abandon its proprietary PowerPC architecture in favor of the Intel architecture.
While he said he does not agree with the school of thought that says the PC is dead, Neff stressed that without consolidation, the stocks will continue to suffer.
"These are some ideas that would make sense," he said. "When they happen and whether they happen obviously is up to the companies involved. But I think investors, unless they feel like trading in and out of these stocks, are going to demand something like this."
Of course, such a radical proposal is sure to raise some controversy, a point which Neff anticipated in the report, stressing that he expects unit growth to continue, but that overcapacity in the industry must be wrung out before PC companies can begin to beef up their bottom lines.
"Our point is that, like other cyclical businesses, this overcapacity has to get worked out," Neff said.
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There's always a denial phase when an industry needs to go into consolidation.
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Andrew Neff
Bear Stearns |
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Neff said it is best for investors to stay on the sidelines until the consolidation process begins. At that point, he says, there will be plenty of time to get into the game and capitalize on those companies that play consolidation the best.
As for detractors who might discourage such bold moves, Neff said that is the usual reaction at the early stages of a consolidation for a cyclical growth industry.
"There's always a denial phase when an industry needs to go into consolidation, and I think that's what we're in right now," he said. "We turned negative in September on this industry, well before a lot of others. So I think we've got a fair amount of credibility in our perspective." 
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