Compaq customer defections looming

New criticism of the proposed merger between Hewlett-Packard Co. and Compaq Computer Corp. surfaced Thursday as a study conducted by investment firm UBS Warburg LLC revealed that an overwhelming majority of Compaq’s Alpha server customers would take their business elsewhere if the merger succeeds.

When asked if a successful HP/Compaq merger would result in HP migrating Compaq’s Alpha server customers to an HP platform like HP-UX, 90 per cent of a wide sampling of Alpha customers said they would be dissatisfied and would look at other vendors outside of HP, according to Don Young, an industry analyst at UBS Warburg in New York.

“When specifically asked what the (Compaq) customer would do if asked by HP to migrate from their current operating environment to HP-UX, the migration path planned by HP, the overwhelming response is dissatisfaction with the majority of users planning to evaluate alternative suppliers,” Young said.

The possibility of a mass exodus of upset Alpha customers threatens the success of a HP/Compaq merger by potentially capping a huge revenue stream for Compaq, Young said. Of Compaq’s revenues for fiscal year 2000, excluding any revenue from PC sales, a solid 60 per cent – US$7.6 billion – was generated from Alpha-related products and services. The loss of such revenue would work against any proposed savings sought by the merger proposal, Young said.

“(HP and Compaq) management has a conservative projection of US$2.5 billion in cost savings. But every merger has failed not because the cost savings were not achieved but because the revenues collapsed,” Young said.

Warburg interviewed a diverse demographic of Compaq Alpha customers ranging in size from 35 employees to 70,000 employees and representing a cross section of industries including education, finance, medicine, technology, and government services. The interviews were conducted between Nov. 28 and Dec. 5, 2001.

Judging by the responses, 73 per cent of the Alpha customers interviewed were “generally satisfied” as Compaq customers before the merger announcement. Roughly 64 per cent responded that they were “very likely” to buy future servers from Compaq before any knowledge of an HP/Compaq merger.

Facing the proposed merger, 45 per cent of the Alpha customers interviewed by Warburg believed it was “less likely” that they would stay with a combined HP/Compaq company, while 55 per cent said their feelings about remaining a Compaq customer were “unchanged” by the proposed merger. No company interviewed said it was “more likely” that they would stay with a combined HP/Compaq if the merger succeeded.

Of those that indicated they would be less likely to remain Compaq customers, explanations ranged from doubt over the future of Tru64 Unix to a lack of confidence in HP enterprise products and services.

Of those that indicated unchanged, the majority required more knowledge of HP’s product road map or had already made the decision to leave Compaq, Young said.

For current Alpha customers, the No. 1 incentive to stay with a combined HP/Compaq would be the continuation of existing Compaq operating systems like Tru64 Unix and OpenVMS, the study found. Compaq continuing the present service relationship and hardware maintenance issues followed as No. 2 and No. 3.

Compaq officials have said repeatedly that its Tru64 and VMS operating systems will live on indefinitely, but the hardware issue creates an additional thorn in the side of Alpha users.

Compaq will transition its OSes from Alpha RISC-based processors to Intel Corp.’s Itanium chip platform in 2003. HP will do the same with its RISC-based chips before 2004. At that point, a combined HP/Compaq would be an all-Intel computer maker, and high-end OSes with lineage from Compaq or HP would be running on Intel’s third generation Itanium chip called “Madison.”

For Compaq Alpha customers, putting their faith in a future Intel chip road map that is still in its proof-of-concept phase with a first-generation chip called Itanium is something less than a comfortable feeling, according to industry experts.

Also, the majority of Alpha customers interviewed by Warburg believed that the cost of migrating to an HP platform would be the same as switching to another server vendor.

In an interview this week, Webb McKinney, the president of HP’s business customer organization and the head of the HP/Compaq integration team, said he was unable to comment on HP’s support of Compaq products prior to the finalization of the merger.

“HP management argues that the cost savings inherent in this deal are significant and that a stronger enterprise computing company will emerge. We, however, believe that the issue is not whether management can achieve their cost savings target of $2.5 billion. The more important issue is how much revenue will be lost from the acquired Compaq business,” Young said.

Hewlett-Packard (Canada) Co. is at

Compaq Canada in Richmond Hill, Ont., is at

UBS Warburg LLC in New York is at