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HP, Compaq in pre-vote channel stuffing claim

Hangover tomorrow

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Damaging allegations that Compaq and HP boosted their most recent quarterly figures by stuffing the channel with inventory have surfaced in the San Jose Mercury.

Analysts disagree on the amount of surplus stock in the channel, and some say they see no surplus at all, but the allegations are very serious indeed.

The vote for the Sircam merger looms, and channel stuffing - where a unit shipped to a retailer is booked as revenue, even if it isn't subsequently sold - is a tactic that adds to the bottom line. HP sales shot up 40 per cent in the final quarter of 2001 over the previous quarter, triple the growth of Dell.

But the high doesn't last that long, and the hangover's terrible.

The most notorious recent example was Palm Inc, which flooded the retail channels with PDAs in an attempt to maintain its market share. Several hundred thousand returned Palms were finally consigned to the landfill, Palm crashed into the red and shed several hundred jobs, eventually losing its CEO.

Between them, Compaq and HP supply 70 per cent of PCs in the US retail channel.

UBS Warburg analyst Don Young, says that Compaq boosted its 2001 figures by at least $85 million by booking promotional extras, such as scanners and printers, as they went into the channel, a change from before when revenue was booked when the PC was really "sold" to the end user.

The argument, in the context of the merger, is that HP in particular is risking future financial problems by enhancing the short-term profitability of the company. No one knows how damaging the allegation is better than Walter B Hewlett Jr.®

The Mercury report is here

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