Merger to create largest IT company in India

Dataquest has put together an advisory for the industry watchers that will

help them read the implications of the merger on the industry.

After the Merger: The New HP in India (Revenues: Rs crore)

* Digital GlobalSoft, HP ISO

HP’s $25-billion acquisition of Compaq (at 0.6325 of one newly-issued HP

share for one Compaq share) ushers a new HP at $87 billion, just below

IBM at $90 billion. Carly Fiorina will remain chairman and CEO of the new

entity and Compaq’s Michael Capellas will be the president. The acquisition

is expected to close in the first half of 2002.

• In India, the merged entity will be the clear #1. Last fiscal (ending
  
  March 2001) revenues for the two added up to Rs 3,301 crore. This
  
  takes it past the current top three in the DQ Top 20 IT companies: TCS (Rs
  
  3,142 crore), Wipro and Infosys.
• HP plus Compaq group revenues for last fiscal, including software
  
  operations HP ISO and Digital India, adds to Rs 3,650 crore,
  
  keeping it at #3 behind the HCL group (Rs 4,413 crore, including NIIT) and
  
  the Tata group (Rs 4,032 crore).
• The system vendor toppers in the DQ Top 20 are Wipro (by total--not just
  
  systems--revenues), Compaq, IBM, HP. This now changes to the new HP at #1,
  
  followed by Wipro, IBM, and, significantly below, HCL Infosys. In India,
  
  Compaq is stronger than HP in computer systems; it’s bigger (#4 vs HP’s
  
  #7 in DQ Top 20) and it grew 62 per cent last fiscal, vs HP’s sedate 35
  
  per cent.
• Significantly, the new HP entity, in India, will assume the #1 slot by
  
  revenue in PCs, Unix servers and workstations, PC servers, and printers,
  
  and tops by units in all these areas except for Unix servers, where Sun
  
  sold more units last year.

What do they gain?

• The big gain for the combined entity is likely to be a larger customer
  
  base. Coupled with the elimination of overlapping computer product lines,
  
  this could lead to lower costs for the same revenues.
• The new entity becomes a mammoth one-stop shop spanning systems, printers,
  
  services and more, a global #2. However, the product range was largely there
  
  with HP anyway, though Compaq was much stronger in PC servers, and consumer
  
  desktops.
• HP gains Compaq’s services business, its distribution network especially
  
  for consumer desktops, its handhelds, and of course its business customers.

Product-line synergies stem from services (Compaq gets 23 per cent

of its global revenues from services — 13 per cent in India — with plans

to push that up), peripherals (HP is the global leader in printers and

is very strong in other devices including scanners), and, to a smaller extent

in systems (Compaq is stronger in consumer desktops, with a far better

distribution network, both in India and globally). Compaq also brings in the

very successful iPaq Pocket PC, which could replace the Jornada in HP’s

portfolio.

Compaq has anyway outlined a shift in focus to software and services. Its

systems margins have been under pressure in recent times; its PC division has

been in the red for seven consecutive quarters now; it lost the #1 PC slot

both globally and in the US market, to Dell. HP, under Carly Fiorina, has also

been under earnings pressure, aggravated by the slowdown and massive

restructuring costs in 2001. HP has been keen to ramp up services and

consulting revenue, the reason for its abortive bid to buy consulting firm PwC

earlier.

What do they lose?

Clearly, there will be product lines terminated, and jobs lost, if the

"cost synergies" that Carly Fiorina has spoken about have to happen

effectively.

There are significant systems overlaps between HP and Compaq. Globally,

systems (PCs, servers, notebooks) bring in a third of HP’s revenues, and

one-half of Compaq’s. Their Unix server businesses are similar. Both have

proprietary RISC processors and architectures -- HP’s 9000, and Compaq’s

Alpha (acquired with Digital in 1998-99). Both have announced a phase-out of

these and a shift to Intel’s 64-bit Itanium processor for high-end servers

over the next three to five years.

Thus, some of the server product lines will have to converge, as will

desktop and portables lines. The trimming could happen from either side. The

HP name will dominate, but some strong Compaq brands like the iPaq and

Presario may stay.

However, PCs would continue to be the largest source of revenue for the new

company at a time when prices are plummeting and unit sales are declining. And

PCs are where neither has able to run an operation as efficient and profitable

as Dell’s.

Also, it will be interesting to see if the resulting organization behaves

more like Compaq, which has been a fairly aggressive company driven by sales

goals, or HP, which has been more consensus-driven.

However, at the top level, there could be some complementarity, among the

two CEOs who came on board in July 1999. Carly Fiorina is known for her

high-level strategy focus; Michael Capellas, for his hands-on grasp of

operations and the nitty-gritty.

For other news items click:

HP-Compaq merger: The Indian perspective

Merger may be tough to pull off

S&P to raise Compaq rating

Capellas, a man of consummate details

Intel-Sun war heats up with the merger