Mixed reviews greet HP-Compaq deal

What started out as a phone call between two CEOs to discuss licensing arrangements ended earlier this month in the surprise marriage of Hewlett-Packard Co. and Compaq Computer Corp. – a move that’s receiving lukewarm reviews.

“I can’t figure out why they’re doing it,” said Alan Freedman, servers and storage research manager at Toronto-based market research firm IDC Canada. “The components that Hewlett-Packard (HP) and Compaq bring to the table, I think there’s a big overlap (there).”

Overlap aside, when they’re added up, the pieces that both companies bring to the table still do not allow the new HP to compete more effectively with IBM, he added.

Based on HP’s notion that each company will lose just under five per cent of its revenue as a result of the merger, the official prediction of 15,000 job cuts worldwide is too low if the new company is to remain profitable, he said.

“It’s going to be more than that,” said Freedman, “probably in the 20,000 to 30,000 range.”

Kees denHartigh, Alberta chair of the HP User Group in Calgary, said he was “stunned” upon hearing the news late Monday night, especially given he had just returned from the Palo Alto, Calif.-based company’s annual user conference in August, where he hadn’t heard any rumours of the impending buyout.

“(HP employees) were just as surprised. It caught them rather unawares too,” he added, referring to a flurry of e-mails he received from HP staff early yesterday.

Although acquiring Houston-based Compaq represents a huge challenge for HP, denHartigh, who works as a systems and network analyst at the University of Alberta’s Electrical and Computer Engineering department in Calgary, said it’s a risk worth taking. He said he’s anxious for Compaq’s high-end Alpha and Unix technology to trickle down into HP products.

“There’s a lot of similarities between the two companies,” he said,” but I think the main reason HP did it was to better compete with IBM.”

The deal makes especially good sense in light of HP and Compaq’s PC assets, where the potential efficiencies are more readily apparent, said Tony Iams, senior analyst with D.H. Brown Associates Inc. in Port Chester, N.Y.

“This really solidifies HP’s position in the PC market. That is a (Compaq) competency that is going to be a huge boost for HP,” he said. “HP now has an end-to-end product offering.”

Others noted the respect accorded to Compaq’s ProLiant line of servers in the user community, and predicted they would likely eclipse some of HP’s existing product family.

Michael Capellas, Compaq’s CEO, underscored the gathering cloud of product uncertainty. “There will be simplification around the products,” he said, speaking at a press conference in New York on Sept. 4.

Officials say the combined company – which will continue doing business as Hewlett-Packard and will be led by its current chief Carly Fiorina – will ultimately save US$2.5 billion annually through “operational synergies”.

Fiorina said changing customer-buying patterns, especially demands for quicker return on investment, prompted the move. “We didn’t do it because of the economy,” she added.

Nor was it a hasty decision – the roots of the buyout go back 18 months. “It began with a phone call from me to Michael to say, ‘let’s see if we can do some licensing together,'” she said. “It was a gradual momentum.”

But buying Compaq – and for a relatively paltry sum that equals only 50 per cent of its total revenue – signals that both companies are on the defensive, which in the IT industry means trouble, according to Jonathan Eunice, president, principal analyst and IT advisor at Nashua, N.H.-based Illuminata.

“Once you circle the wagons, you’re in a stronger position . . . (but) the fact you had to circle them is not a good sign,” he said. “I don’t think there’s any major threat to IBM here.”

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