HP, Compaq merge: Competitive advantages still far off

Adria Ferguson

While it’s still uncertain whether the purposed Hewlett-Packard (HP)/Compaq
merger will go through, any anticipated benefits short of mere cost cutting
through reduction in general and administrative will be at least 12 months away.
The reorganization will pose significant challenges to both organizations, which
have had troubles in the past with acquisitions and large-scale operations. It
took years for Compaq to recover from its acquisitions of Digital and Tandem.
Additionally, HP, which spun-off Agilent a few years ago because the company was
becoming too large and losing its focus, has had little experience with
large-scale acquisitions and has already experienced one failed buyout this year
with its attempt to acquire PricewaterhouseCoopers.

Due to the enormous amount of overlap in products and services, the status of
many divisions, product lines and employees is up in the air. Carleton Fiorina
(chairman and CEO) and Michael Capellas (president) have announced the intent to
layoff approximately 10 per cent of the workforce, or an additional 15,000 jobs,
once the deal is completed (bringing the total to about 30,000 job cuts for the
companies this year). The merger is still pending regulatory (and Wall Street)
approval; however, HP and Compaq should decide and communicate the proposed
company and product strategies as soon as the merger is finalized. The longer
the companies must wait to announce their future plans, the higher their risk of
losing highly skilled employees and large accounts.

Additionally, both companies’ services divisions are highly focused on
maintenance, installations and infrastructure project management, but have less
experience with large-scale high-level consulting projects. While the combined
services offerings of HP and Compaq will significantly enhance their overall
services capabilities, the offerings are less complementary than if HP had
acquired a professional services provider, since much of what HP will acquire
would be Compaq specific expertise. Giga estimates that less than 20,000 of the
65,000 services employees are full-time designated professional consultants,
which still places the professional services behind competitors like IBM Global
Services, the Big 5 and large systems integrators.

The uncertainty surrounding the future of the existing product lines has
clearly opened the door to competitors that can ensure a clear product road map
and company stability. While existing clients are unlikely to leave HP or Compaq
because of the merger, it will be an added challenge in winning new accounts.
Even after the merger, IBM will still be the largest worldwide server and
professional services organization (in terms of revenue) with an extensive yet
centralized product line.

The combined HP/Compaq entity will be the largest vendor in the printer,
WinTel server and profit thinning PC industry. Additionally, the organization
will have more extensive services offerings than competitors Sun and Dell.
However, the company will need to efficiently centralize operations (which will
take time) in order to compete more effectively with Dell’s direct
distribution model. Furthermore, while companies like Sun and Dell are
significantly smaller than the combined HP/Compaq organization would be, Sun and
Dell tend to be focused on specific, related product lines, which is part of the
reason Sun has been a market leader in the Unix server industry while Dell will
continue to be a strong low-cost player in the PC and WinTel server market.

HP and Compaq will face the challenge of addressing internal competition and
bureaucratic problems while attempting to execute the reorganization quickly and
without losing focus. Until the merger is finalized HP and Compaq are still
competitors. Therefore, there is also a risk that it’s completed HP could use
Compaq’s somewhat weakened position in competitive situations to sell more HP
equipment and services. In the long run, the proposed merger has the potential
to enhance the companies’ overall product and services offerings. If the
company can successfully maintain, integrate and enhance its key technologies
and people while reducing noncore and redundant divisions. However, there are
significant challenges ahead for HP and Compaq, and the companies will need to
prove they can handle a merger of this magnitude and deliver more than a three
per cent reduction in costs by mid-fiscal 2004 to justify the benefits and risks
of the acquisition.