Merger may be tough to pull off

Adam Pasick

NEW YORK: Hewlett-Packard Co.'s $20 billion acquisition of Compaq Computer

Corp is a remarkably bold move - not just because it is the biggest deal in

computer industry history - but because most high-technology mergers have proved

to be such spectacular failures.

Analysts said the combination, born out of a price war in the computer

industry and the need to slash costs, carries further risks because the

companies have a poor track record of being decisive enough to remake

themselves. "We would have concerns about the ability of the companies to

smoothly integrate the two operations in view of each company's recent

challenges and shortfalls," said Bear Stearns analyst Andrew Neff.

Both Hewlett-Packard and Compaq have had recent large-scale acquisitions that

fell short of the mark. Compaq purchased pioneering computer company Digital

Equipment Corp. in 1998 for about $9.6 billion. But, after waffling for three

years, it finally abandoned Digital's Alpha chip earlier this year in favor of

technology from Hewlett-Packard and Intel Corp.

Hewlett-Packard's track record is equally spotty, according to industry

experts. The company has no experience in major deal making, and has long been

criticized for a paternalistic management style that has prevented it from

cutting jobs and firm strategies.

Hewlett-Packard's recent acquisitions include the purchase of electronic

payment firm VeriFone for $1.29 billion in 1997, supercomputer firm Convex

Computer for $250 million in 1995, and workstation maker Apollo Computer for

$450 million in 1989.

"If you want a list of the world's thinnest books, Hewlett's successful

acquisitions would be one of them," said an analyst who declined to be

quoted by name. "VeriFone didn't work, Apollo didn't work," the

analyst said. "Putting together companies is not trivial and both of these

companies are great examples of that," said Marc Klee, portfolio manager of

the $860 million John Hancock Technology Fund, citing the Compaq/Digital deal in

particular. "It's just hard to do. It gives me an uncomfortable

feeling."

Ted Waitt, the chief executive of rival personal computer maker Gateway Inc.

told Reuters he sees the merger as a break for his business. "Having a huge

challenge in front of them with integration, it's a distraction," Waitt

said in an interview before a presentation at an investor conference in New

York. "I actually think (this) makes things easier for us."

Incompatible structures?



Neff said the way Hewlett-Packard and Compaq have structured their businesses
could add to the difficulty of integration. Hewlett-Packard is organized in a

matrix structure - divided into product groups that draw on central resources

like sales and marketing. In contrast, Compaq's divisional structure gives each

product group its own self-contained sales and marketing force.

"In terms of integrating the two (matrix and divisional structures),

it's often very challenging," Neff said. "Right now I don't like (the

deal) in the short term," said Kevin McCloskey, who runs the $3.5 billion

Federated American Leaders Fund for Pittsburgh-based Federated Investors.

"Execution is going to be the key, delivering on every promise that is

made."

The devil of the Hewlett-Packard/Compaq integration will be in the details,

according to technology sector veterans like Bob Davis, former chief executive

of Internet media firm, Lycos. He oversaw negotiations on the failed merger of

Lycos with USA Networks, but eventually sold his company to Spain's Terra.

"The successful companies are those that can implement a cost structure

that is better than the competition, which is what this merger is all

about," said Davis, now vice chairman of Terra Lycos and a venture

capitalist with Highland Capital Partners.

"We'll see in 24 months whether it works that will be a function of

execution," Davis said. If the combined company stumbles, competitors will

be prepared to step in. "There is going to be a lot of confusion between

those two companies for probably the next two years," Mike Ruettgers,

chairman of rival data-storage giant EMC Corp., told reporters at an investor

meeting in New York. "Any time you put two huge companies together you are

going to get difficulties."

(C) Reuters Limited 2001.