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Hewlett-Packard Co. could be forced to license the Compaq brand name to win antitrust approval for its $25 billion acquisition of Compaq Computer Corp. Antitrust lawyers said the unusual step — in which personal computers called Compaq might be made and sold by someone else — may be necessary if the companies fail to convince the government that the merger of the No. 2 and No. 3 makers of PCs won’t harm competition. They said unlike in most mergers, there is no clear package of assets that could be sold to restore competition in the retail channel lost from the deal. “Selling plants alone is meaningless because of overcapacity,” said Stephen Mahinka, a partner in the Washington, D.C., office of the Morgan, Lewis & Bockius law firm. “The interesting thing is whether they will be forced to give up the brand name.” HP and Compaq dominate the market for PCs sold through mass retailers such as Best Buy Co. Other major PC makers such as Dell Computer Corp. and Gateway Inc. aren’t distributed through such outlets. The distinction between all PCs sold to consumers and those sold through retail outlets is crucial because Compaq and HP have a commanding presence in retail stores that they lack for the broader market. This means regulators could be concerned that the deal would harm competition for computers sold in stores without evaluating what it means for the broader market. HP and Compaq are likely to push for the broadest market definition possible. Together, they would control roughly 20 percent of the global personal computer/portable computer market, according to published reports. But one source said that the market share number is much higher if the market is limited to desktop computers sold through third-party retailers, such as electronics stores. Another Washington, D.C., antitrust lawyer noted that computers are relatively easy to build because production involves assembling components made by others. The challenge is to win consumer confidence in the product, something Compaq already has done, the lawyer said. “Having a brand name has value,” the lawyer said. “So the solution is to bundle the capacity with the brand name.” The companies appear to have left the door open to the licensing of the Compaq name. Speaking to investors, Hewlett-Packard CEO Carly Fiorina said HP will be the dominant brand, though the company intended to retain the Compaq sub-brand names. Several observers said that meant HP would employ names such as Presario but wouldn’t brand products as Compaq. Thus, one company could theoretically make PCs, distribute them to retailers and license the Compaq name, using the goodwill behind the brand name to compete with the sub-brands that have flourished because of it. Officials at Compaq and H-P did not return calls for comment. Fiorina said in the conference call that HP was prepared to make divestitures to secure antitrust approval, but she declined to specify what was on the table. “We have a real clear idea of what we have to do to get this done,” she said, adding that lawyers have been investigating antitrust issues for several weeks. Fiorina estimated that the companies would need six to nine months to shepherd the deal through the U.S. and European antitrust reviews. She said she planned to visit in the next few weeks with E.C. competition chief Mario Monti. She also said that the companies did not have preliminary discussions with either U.S. or E.C. antitrust officials. “This is pro-consumer and pro-competitive,” Fiorina said. It was unclear Tuesday whether the U.S. Federal Trade Commission or the Department of Justice would handle the deal. The FTC appears more likely because it reviewed Compaq’s purchase of Digital Equipment Corp. and it generally tackles deals involving computer hardware. European Commission competition authorities have assigned personnel to review the transaction. It was unclear Tuesday the extent of the E.C.’s concerns. Fiorina said the HP/Compaq deal is quite different than the General Electric Co./Honeywell International Inc. merger, which the E.C. rejected after U.S. officials approved it. “We think this is a different industry than in GE-Honeywell,” she said, adding that the barriers to entry in the PC market are comparatively low. While Fiorina would not discuss strategy, she appeared to suggest that HP will argue that regulators need to define the market broader than just personal computers. “This combination is about so much more than PCs,” she said at the investor conference. The deal would give the combined companies a stronger base to enter the market for the next generation of devices for Internet access, a realm where the companies are less dominant than in personal computers. One antitrust lawyer said HP cannot succeed in expanding market definition without proving that these alternative devices constrain PC prices. This could be very difficult, which is why several antitrust lawyers predicted the government will concentrate on what the loss of Compaq will mean for personal computer buyers. Regulators will give the deal an “intensive review” because Compaq and HP are credited with driving down PC prices, said Robert W. Doyle Jr., a partner at Powell, Goldstein, Frazer & Murphy in Washington, D.C. “You are removing a maverick firm that has had a significant impact on prices,” he said. The government also will worry that losing Compaq could result in less PC innovation, said David Balto, a partner at White & Case in Washington, D.C. “It is vital for that innovation competition to be protected,” Balto said. One arbitrageur said the investment community is gearing for a long fight. He cautioned against reading too much into the relatively narrow spread, saying investors see little risk of Compaq’s stock price falling if the deal fails because the small premium HP is paying. Still, some antitrust lawyers said Tuesday that HP and Compaq might to be able to push the deal through without major concessions. Mahinka said the argument about becoming a stronger competitor in next generation devices provides a pro-consumer rationale. He also said the relative ease of entry makes it tough to find competitive problems. Combining the No. 2 and No. 3 PC makers is less problematic than the merger of H.J. Heinz Co. and Beech-Nut in the baby food sector. The FTC successfully stopped Heinz/Beech-Nut deal in court, arguing in part that new entry was very unlikely. “You have a different market dynamic here,” he said, noting that it is less difficult to set up a computer assembly plant than it is to establish a baby food factory. A third D.C. lawyer said the projected synergies from the merger, estimated at $2 billion for the 2003 fiscal year, mean the companies could employ the efficiency defense, which allows regulators to approve otherwise anticompetitive deals if cost savings are high enough. HP also could cite Compaq’s weakening financial position. Its stock fell two-thirds in the past year and it lost money last quarter. Though its woes are not sufficient to qualify for the failing-firm defense, antitrust officials may consider a company’s overall financial health when reviewing its ability to effectively compete. Copyright (c)2001 TDD, LLC. All rights reserved.

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