Hewlett-Packard’s proposed acquisition of Compaq Computer has been about as well received as a brass-knuckles exhibit at a convention of pacifists. Investors do not like the idea at all, and the stocks of the two personal-computer makers have plummeted since the deal was announced on Sept. 3.

Faculty members at Wharton who have studied mergers and acquisitions and industry consolidations say Wall Street’s thumbs-down comes as no surprise because this proposed marriage appears about as star-crossed as any relationship could be. Still, if H-P and Compaq proceed with the transaction and receive shareholder and regulatory approval, there still may be additional ways to try to strengthen the new company’s competitive position, say several professors.

However, the consensus is that, as things stand, the companies will have a difficult time making a merger work. “I think it looks desperate,” says Robert E. Mittelstaedt Jr., vice dean and director of Wharton’s Aresty Institute of Executive Education. “I don’t see a bright side to it. I think they’re both struggling and they’re throwing something up against the wall to see if anything sticks.”

“Computer services – everything from repair services to technical assistance to running computer networks – is still a good business,” says marketing professor George Day. “But the PC-manufacturing part of the industry is really in bad shape. That’s why I think the Street is so down on this merger. It would put together two weak players in a crummy industry.”

Day says Compaq and H-P are not prepared to compete effectively against IBM in providing information-technology services. Nor, he says, could a combined company hope to make a serious run at Dell Computer, which is the leader in selling made-to-order PCs at low prices. Day also says that Compaq and H-P have “two very different cultures, so their integration problems are huge.”

Daniel Levinthal, professor of management and economics, points out that Compaq has yet to fully digest its acquisition of 1998 Digital Equipment, a deal that many consider to be a failure.

For their part, H-P, of Palo Alto, Calif., and Houston-based Compaq say they remain excited about joining forces. They say the merger would make the combined firm, with $87 billion in annual sales, the world’s No. 1 organization in servers, PCs, hand-held computers, and imaging and printing. What is more, they say, the new company would have leading positions in IT services, storage and management software. The companies expect to eliminate 15,000 jobs and save $2.5 billion after merging.

H-P CEO Carleton (Carly) Fiorina and Compaq chief executive Michael Capellas have been vocal in touting the benefits of a deal. But given Wall Street’s harsh reaction, management professor Harbir Singh says Fiorina and Capellas may wish they could find a face-saving way to call off the transaction and, as separate entities, look for other ways to adapt in an industry that is ripe for a big-time shakeout.

One option would be to adopt a “last-survivor strategy” and try to be one of the few PC companies to remain standing after others disappear in a shakeout, faculty members say. Another option would be to form alliances with consulting companies that provide high-margin computer services to corporate clients.

All of the professors agree that H-P’s move to buy Compaq represents a textbook case of what happens when companies feel the enormous pressures that arise when a once-vibrant industry matures, sales growth sputters and profit margins get squeezed. In such an environment, consolidation looks to be the best way to weather the storm.

Eric Clemons, professor of operations and information management, points out that companies typically merge for any number of reasons. They may wish to obtain complementary resources, as when a company like Ford acquires Volvo and Jaguar, or to add to their geographic coverage, as when a European company buys an Asian firm. Or, companies may want to provide an integrated portfolio of products or services; a merger of a bank and an investment firm can achieve this goal.

In H-P’s case, Fiorina wants to acquire Compaq for another classic reason: to obtain critical scale in a core business and thus reduce costs. But Clemons finds this rationale unconvincing in H-P’s case.

“Even the most profitable PC makers do not seem to have [size and] scale comparable to IBM’s, and those PC makers are doing much better” than H-P or Compaq, he says. “Carly may wish to take H-P into services, but I do not see how acquiring Compaq could be anything but a distraction if she wants to move H-P in that direction.”

Singh, who has extensively studied mergers and acquisitions, says it is not surprising that H-P and Compaq wish to join forces. But he agrees with Day that even a combined H-P/Compaq lacks the kind of high-margin, computer-service business to take on an IBM. “In a consolidating industry it makes a lot of sense to acquire capacity, which has good future income-generating potential,” Singh says. But in this case it’s not clear “that the future income-generating potential combination is, in fact, high. Compaq and H-P have not given a coherent plan for the market to look at. The question is, can these assets be used to create value.”

To survive in a consolidating market, Compaq is more dependent on the deal than H-P, Singh adds. “Compaq has been sliding for a long time. Compaq bought Digital Equipment and that did not work out.” Nor, Singh says, did H-P’s earlier attempt to buy PricewaterhouseCoopers pan out; H-P initiated that deal but walked away from it. H-P, which in 1999 moved some of its business services to a spin-off company, Agilent Technologies, today is heavily dependent on profits from sales of printers and print cartridges.

While a merger would make the company the world’s biggest PC maker, that may be a slim reed on which to hang hopes for success, given the state of the PC business. In a 1997 article in the Harvard Business Review, titled “Strategies for Surviving a Shakeout,” Day described how, in a first wave of consolidations, the PC industry shrank from 832 to 435 companies in the late 1980s. He dubbed this a “boom and bust syndrome” where “an unsustainable glut of competitors is attracted to the market at a rate that overshoots the industry’s long-term carrying capacity.”

Day uses the term “seismic-shift syndrome” to characterize today’s PC climate. Nowadays, stable, mature companies are compelled to look for measures to stay competitive in an industry where consumers are not as interested in buying PCs as they were just a few years ago. Day stands by a prediction he made in the article, which forecast that the number of major players in the computer industry, currently about 20 or so, will eventually dwindle to five.

Singh says H-P and Compaq are between a rock and a hard place, and could simply terminate the merger. “My sense is they may find a way to walk away from the deal. If they do, there may be some recovery in the stock price. But if scale is what you need to do well in the computer-service industry, what would be the companies’ next step?”

If H-P and Compaq go ahead with the transaction, Levinthal says the combined company could consider a couple of steps to strengthen its position. One would be to offer to buy Unisys, which has made a successful transition from manufacturing PCs to selling computer services. But a better idea, Levinthal says, would be to seek alliances with consulting firms like PricewaterhouseCoopers, Arthur Andersen or Accenture, which provide IT services. H-P was on the right track when it thought of merging with PwC, Levinthal says, but it is not necessary to buy such a company.

“I don’t think I’d want to acquire one of those big guys,” Levinthal says. “If I buy Arthur Andersen, the other major consulting firms may not be so excited about buying my hardware. With a partnership model, you have a hand-in-glove relationship with a number of major consulting shops and it’s not a proprietary situation [regarding PC sales.]”

Mittelstaedt says he is not convinced that partnerships would allow H-P and Compaq to compete against IBM. He suggests instead that the company hire the right people to strengthen their services business over time. Another option, he adds, would be for H-P and Compaq to proceed with its plans and adopt the last survivor strategy. “If business is going badly you acquire other companies so that as profit margins go down, at least you have the biggest volume. As others exit the business, this may allow you to improve your margins for a while.”

Singh says such a strategy is plausible. But “the dilemma is that there are multiple segments in the business – hardware and solutions.” Still, he adds, “it may be that H-P and Compaq are trying to build survivability on the hardware side.”

In the meantime, making PCs will become increasingly commoditized and there may come a day when most U.S. manufacturers abandon the business. Says Mittelstaedt: “I don’t think the PC industry is going to go away, but no U.S. companies can afford to be in the business [because of costs]. It’s just like textiles and steel. We still buy clothes and steel, but we don’t make much clothing or steel here anymore.”