These Industry Powers Have Never Been More Scared

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Many investors are holding their breath even as they hold out plenty of hope looking at the recently announced deal between Apple and IBM.

The upside, many say, is unlimited because it's such a brilliant move.

Hardly.

In fact, the deal reeks of desperation and unprecedented weakness.

We've seen this playbook before…

We've Seen These Mergers Before

Today's computer market has some similarities to yesterday's airline industry. With relentless competition and enormous downward price pressures, the only way to survive was to team up with rivals to improve economies of scale and broaden product outlets (In the case of airlines, acquiring flight routes and gates).

Over the past 12 years, we've seen a series of bankruptcies and mergers that have taken the airline industry down from 10 major U.S. carriers to only four. At the same time, complaints have more than doubled about everything from reservation systems to baggage and on-time performance. One cost of consolidation has clearly been customer service, and despite expanded economies of scale, less competition has only driven prices higher.

Another "merger to safety" is in the auto supplier market.

Since 2006, we've seen a flurry of activity as formerly competitive companies have teamed up to combat more cost-effective foreign suppliers. According to PWC, there have been 1,944 deals since '06, with 27 of the world's largest suppliers seeking consolidation here in the United States. They are, in effect, closing ranks against foreign competition.

IBM Is Apple's Backup Plan

If you think about this for a minute, what I'm saying makes a lot of sense: the Apple and IBM teaming strategy is a move towards mutual safety, not growth.

Take smartphones, for example.

According to International Data Corporation, last year the industry shipped more than one billion units for the first time. That's up 38.4% from 2012 and represents a doubling of smartphone volume in just two years.

Much of the hope driving this deal is that Apple and IBM will be able to tap new "synergies" that allow Apple access to IBM's business markets, and give IBM access to Apple's devices and cloud services.

Unfortunately, "synergy" is corporate buzz speak used when someone is trying to explain why a particular plan or undertaking will work when the data suggests it won't, or that there's a snowball's chance in hell of success.

When you break down the composition and growth of the smartphone devices shipped by operating system, you can see very clearly that the battle is all but over.

Like it or not, Google's Android operating system holds a commanding lead and now accounts for a staggering 80% of all worldwide smartphone operating systems shipped. The majority of gains have come directly at Apple's expense.

The way I see it, Apple could sell 100% of IBM's clientele a full suite of its latest smartphones, tablets, and computers and still not move the needle.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Curtis Edmark | July 24, 2014

    Mergers and consolidation are where big business is going.

  2. Bob Mugge | July 24, 2014

    You are full of it. That is the most ridiculous analysis I have ever read. FACT, Apple just had it's biggest quarter for a 3rd quarter in it's history. It is coming out with a whole new batch of products, Samsung is the one on the ropes, they are the ones whose profits are way off. About 20 percent the iPhones sold are converted high end android users. The only place I see any loss of sales is to the low end tablet market. They can be bought for under 100 dollars. The android operating system sucks compared to ios. Not even close. Apple getting in bed with IBM is all about the enterprise system and getting more business from business. You say if Apple got all the IBM enterprise business and got all the iphones and tablets it wouldn't move the needle – that makes no sense.

  3. kumar | July 29, 2014

    Can you comment on HZNP. Any change in company financials – yesterdays drop was related to a distribution hick up. Is the a stock a sell or is it a time to buy some more .

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