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Andrew T. Gillies is Director of Communications at the Center for Audit Quality, an affiliate of the American Institute of CPAs, in Washington, DC. Based in Washington since 2002, he has also worked in editorial and communications roles at the Investment Company Institute, the World Bank, Forbes, and Vault.com. His policy-themed writing has focused on aerospace and defense, energy and environment, transportation, and financial services.

Tuesday, September 04, 2001

Computer Industry Consolidation

NEW YORK - The proposed $25 billion purchase of Compaq Computer by Hewlett-Packard sends a strong signal that the long-awaited consolidation in the technology sector may have begun. Massive losses and depressed share prices could lead to several mergers among hardware, chip companies and telecom equipment manufacturers in the months ahead.

Computer-company mergers do not always have successful outcomes, but in an industry that is reeling from overcapacity and a sharp drop-off in demand, there may be little choice but to seek new efficiencies and economies of scale.

One such example is Advanced Micro Devices (nyse: AMD - news - people ), a microprocessor manufacturer that has been gaining market share at Intel's (nyse: INTC - news - people )expense. AMD has an enterprise value of $4.5 billion. Calculation: market value plus total debt and the liquidation value of preferred stocks minus cash and equivalents. The enterprise value represents the minimum price an acquiring firm must pay to buy another publicly traded company.

Dividing AMD's enterprise value by its latest 12-month operating income (earnings before interest, taxes, depreciation and amortization) produces an enterprise multiple of 3.5. By contrast, Compaq (nyse: CPQ - news - people ) has an enterprise multiple of 6.

Full story at Forbes.com