What started out as a phone call between two CEOs to discuss licensing arrangements ended earlier this month in the surprise marriage of Hewlett-Packard Co. and Compaq Computer Corp. – one that’ leaving many industry analysts scratching their heads.
“I can’t figure out why they’re doing it,” said Alan Freedman, servers and storage research manager at Toronto-based market research firm IDC Canada. “The components that Hewlett-Packard (HP) and Compaq bring to the table, I think there’s a big overlap (there).”
Overlap aside, after adding up the pieces that both companies bring to the table, the new HP is unlikely to compete more effectively with IBM, he added.
Based on HP’s notion that each company will lose just under five per cent of its revenue as a result of the merger, the official prediction of 15,000 job cuts worldwide is too low if the new company is to remain profitable, he said.
“It’s going to be more than that,” said Freedman, “probably in the 20,000 to 30,000 range.”
Kees denHartigh, Alberta chair of the HP User Group in Calgary, said he was “stunned” by the news, especially since he had just returned from the Palo Alto-based company’s annual user conference in August, where he hadn’t heard any rumours of the impending buyout.
“(HP employees) were just as surprised. It caught them rather unawares too,” he added, referring to a flurry of e-mails he received from HP staff early yesterday.
According to Stamford, Conn.-based Gartner Inc., the deal is unlikely to ever reach completion. “Hewlett-Packard and Compaq Computer have not made a convincing case for this defensive deal,” noted Andrew Butler, Unix and midrange strategies analyst, in a research note.
Not everyone greeted news of the merger with scepticism. The deal makes especially good sense in light of HP and Compaq’s PC assets, where the potential efficiencies are more readily apparent, said Tony Iams, senior analyst with D.H. Brown Associates Inc. in Port Chester, N.Y.
“This really solidifies HP’s position in the PC market. That is a (Compaq) competency that is going to be a huge boost for HP,” he said. “HP now has an end-to-end product offering.”
It will also help HP in its bid to wean customers off of its high-end, proprietary PA-RISC systems and on to Intel’s IA-64 architecture, said Iams.
Risky venture
Still, he cast doubt on the future of Compaq’s Alpha and Tru64 systems, which, he said, won’t find much room alongside HP’s PA-RISC and HP-UX technology. “I think there is some risk there,” he said.
Although acquiring Houston-based Compaq represents a huge challenge for HP, denHartigh, who works as a systems and network analyst at the University of Alberta’s Electrical and Computer Engineering department in Calgary, said it’s a risk worth taking. He said he’s anxious for Compaq’s high-end Alpha and Unix technology to trickle down into HP products.
“There’s a lot of similarities between the two companies,” he said,” but I think the main reason HP did it was to better compete with IBM.”
Officials say the combined company – which will continue doing business as Hewlett-Packard and will be led by its current chief Carly Fiorina, with Compaq chairman and CEO Michael Cappelas as president – will ultimately save US$2.5 billion annually through “operational synergies”.
Fiorina said changing customer-buying patterns, especially demands for quicker return on investment, prompted the move. “We didn’t do it because of the economy,” she added.
Nor was it a hasty decision – the roots of the buyout go back 18 months. “It began with a phone call from me to Michael to say, ‘let’s see if we can do some licensing together,'” she said. “It was a gradual momentum.”
Assuming the deal meets regulatory approval, HP will become one of the largest information technology companies. Based on figures reported for the last four quarters, the combined company would have annual sales of US$87.4 billion and operating income of US$3.9 billion. In contrast IBM Corp. reported total sales of US$90.1 billion in the last four reported quarters.
Total staff at the new company will number around 145,000 people in 160 countries .
But buying Compaq – and for a relatively paltry sum roughly equal to 50 per cent of its total revenue – signals that both companies are on the defensive, which in the IT industry means trouble, according to Jonathan Eunice, president, principal analyst and IT advisor at Nashua, N.H.-based Illuminata.
“Once you circle the wagons, you’re in a stronger position . . . (but) the fact you had to circle them is not a good sign,” he said. “I don’t think there’s any major threat to IBM here.”
IDC’s Freedman noted it’s unlikely the newly combined services division, including Compaq’s “break-and-fix” model, can compete with IBM Corp.’s platform-independent consulting practice.
Analysts also note the time and expense involved in merging companies of this size – during which Sun and IBM can attempt to wrest away nervous HP and Compaq customers – together with the potential for culture clash could become an insurmountable task.
“I don’t really know how to judge this. I just know, based on the size (of HP and Compaq) and the large number or products that it will be an issue,” Eunice said.
Hewlett-Packard (Canada) Ltd., a wholly owned subsidiary of HP, was established in Montreal in 1961, and now has more than 1,800 employees at 19 locations across the country. Its revenue in fiscal 2000 was $1.8 billion.
Compaq Canada Corp. is the fourth largest subsidiary of its parent company. It was established on in September 1985 – three years after Compaq itself was founded. It’s currently based in Richmond Hill, Ont.
Compaq has been no stranger to merger activity; on Sept. 2, 1997, Compaq Tandem Computer Inc. completed a merger agreement in a stock-for-stock transaction.
Not even a year later, On June 11, 1998, Compaq and Digital Equipment Corp. completed a merger agreement.
– With files from IDG News Service
