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)
Compaq | HP | New HP | Sun | IBM | |
Desktops | 856 | 465 | 1321 | 347 | |
Portables | 158 | 12 | 171 | 119 | |
Unix servers | 224 | 220 | 444 | 373 | 138 |
PC servers | 252 | 95 | 347 | 126 | |
Workstations | 48 | 60 | 108 | 95 | 23 |
Other systems | 4 | ||||
Printers | 460 | 460 | |||
Services | 224 | 224 | 774 | ||
Packaged software | 81 | ||||
Others | 226 | 226 | 50 | 48 | |
Software* | 184 | 165 | 349 | ||
Total | 1945 | 1705 | 3,650 | 518 | 1662 |
* 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.
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HP-Compaq merger: The Indian perspective
Merger may be tough to pull off