Valuation of the computer hardware & peripherals industry

The computer hardware and peripherals industry includes subgroups of SIC code 357: Computer and Office Equipment. The industry includes manufacturers of computers, memory storage, printers, graphic displays and other related devices. It does not include developers of software, who are covered in group

M&A Activity in the Industry

M&A activity decreased in 2001, and the companies that sold, on average, were purchased for lower prices relative to sales, assets and net worth.

News coverage of mergers in this industry has been dominated by the potential merger of Hewlett-Packard and Compaq Computer. If the highly contested merger is completed, it will create a company that would be second only to IBM in the industry in terms of revenue. The merged company would also replace Dell as the number one provider of personal computers.

Benefits of the merger are far from certain, however. It will be difficult to smoothly merge such large companies, and competitors such as Dell, IBM and Sun will be waiting to pick up any business Hewlett and Compaq lose from problems arising from the merger. Studies conducted by market research firm Miller-Williams Inc. indicate that HewlettPackard and Compaq have distinct customer bases that do not compliment each other. The research concludes that the merger will, however, benefit the PC industry as a whole by causing buyers to re-evaluate their suppliers and therefore spurring demand.

Hard Times in the Industry

2001 was a hard year for the industry. With companies in all industries tightening their belts, businesses have been less willing to spend on computing gear. Individual consumers have also decreased spending in the current uncertain economy, due to pay freezes and lay-offs.

The decrease in spending was directly felt by the computer industry. Sun Microsystems, after several years of record growth and profits, saw its earnings fall along with its sales, losing $431 million in the second fiscal quarter that ended December 2001. IBM, one of the industry's best performers, made $7.7 billion in profit, a drop from the $8.1 billion profit of the previous year.

Hope for the Future

There is still hope of recovery. According to Value Line, the computer and peripherals industry should benefit from interest rate cuts and increased government spending intended to bolster the economy. By the second half of 2002, businesses should be seeing signs of better prospects, which should make them more willing to purchase computer equipment. Miller-Williams also projects a slight increase in customer demand this year.

Not everyone is optimistic, however. According to Roger Kay, an analyst for International Data Corp., the struggling global economy will likely dampen computer sales this year. John Joyce, Chief Financial Officer for IBM has said that 2002 "is going to be another demanding year and a tough one to forecast."

Another source of hope for the industry lies in innovation. It is more important than ever to develop new and exciting products, and most importantly, products that people want to buy. Apple computer has redesigned the Macintosh into new and fashionable forms, but the changes are primarily in design, rather than function. Many were impressed by Apple's Cube, but at its price, few were willing to buy it. Compaq is hoping to woo consumers with the introduction of its D500 Ultra-slim desktop, which weighs just over 11 pounds and is 75 percent smaller than the average desktop PC.

If the economy improves, the competition will begin in earnest. For PC companies to prosper, they must both retain their loyal customers and gain new buyers by stealing them away from competitors.

Sources: Value Line, Electronic News, eWeek, PR Newswire, Done Deals