Compaqt Package

It is perhaps the biggest merger in the history of technology. Yet, within days of Hewlett-Packard's (HP) announcement of its peaceful takeover of Compaq Computer Corporation, doubts have started surfacing over the future of this gigantic deal.

Late on Tuesday evening, California-based HP, one of the world's biggest PC and computer peripheral companies ($47 billion), announced its decision to take over Texas-based PC giant Compaq ($40 billion), in an all-stock deal valued at a whopping $25 billion. The deal, which gives HP a 64 per cent share in the new company, is expected to close in the first half of 2002, creating New HP, the world's second biggest computer company, after ibm, with operations in over 160 countries, employing over 1,45,000 people and an expected combined revenue of around $87.4 billion. And the Indian subsidiary of the new entity will be the country's largest computer hardware company with revenues of more than Rs 3,400 crore and a 17 per cent share in the organised PC market.

Carleton (Carly) Fiorina, HP ceo, will head the new company while her Compaq counterpart, Michael Capellas, will be the president. The new company would be divided into four wings—Imaging and Printing (to be headed by India-born Vyomesh Joshi), Access Devices, IT Infrastructure and Services. Says Fiorina: "We've been watching Compaq for some time and realised we were heading in the same direction with the same vision." In an e-mail message circulated to all HP employees following the announcement, Fiorina wrote: "Today is a historic day for our industry. We have an opportunity to create a world where technology works for the people and not the other way around. The merger greatly accelerates our journey to reinvent HP, our journey to transform ourselves into an indisputable market leader."

Interestingly, Fiorina and Capellas, the two minds behind the union, have moved up their corporate ladders almost together. Both were named ceo of their companies within days of each other in July 1999 and were elevated as board chairpersons in September last year. And, of course, both have been finding the going tough against a downturn in the computer sector.

With the "most complete" product line-up after the merger, New HP is expected to challenge Dell Computers in PCs and Sun Microsystems in servers. In the US, it will have an 81 per cent share in the retail PC market. HP's numero uno status in printers and imaging devices will make New HP a world leader in this segment too.

The synergy of the two companies is expected to save about $390 million in 2002, $2 billion in fiscal 2003 and $2.5 billion by 2004. But unfortunately, most of this will come after massive job cuts. Almost immediately after the announcement came the bombshell: 15,000 jobs would have to go. And if market analysts are to be believed, this is just the tip of the iceberg.

Experts call this is a merger for survival, a decision forced by a slowing economy and dwindling PC sales over the last two years. Add to this Dell Computers' aggressive pricing policy, which squeezed both the companies' margins—Dell has a direct-marketing and build-to-order strategy which cuts down on both dealer costs and inventories. Both HP and Compaq tried to emulate this—HP by outsourcing a majority of its components and Compaq by adopting a modified made-to-order strategy. Both failed to achieve anything significant eventually. In August this year, HP announced a massive drop in net profits with revenue for its computing systems dropping by 22 per cent in the third quarter.In the first two quarters, Compaq's PC division lost $82 million and $155 million respectively.

The question is: post-merger, will they succeed in a turnaround? Unlikely, feel analysts. The Gartner group, which monitors IT sector growth, calls it a defensive move by the management teams in the face of an uncertain market. The merger will only add to the uncertainties. Says Gartner: "Most likely, the two once-great companies will not live up to their past achievements by combining assets. The deal would mean many overlaps in products, technologies, distributors, services, facilities and jobs." Indeed, New HP has a daunting task ahead—to create coherent strategies for four server architectures, seven operating systems, four storage architectures, and several service businesses.

In PCs, it has to maintain two brands, of which one may have to go. Gartner is therefore doubtful whether HP and Compaq would complete the deal at all. "If they do, their customers and partners are likely to experience at least two years of major uncertainties across all their business activities. This deal may not benefit any of them, including most customers," says Gartner. But Fiorina is nonchalant. Says she: "We won't lose momentum. But it is possible there will be a revenue loss."

The biggest challenge for the new entity, however, is to carve out a brand new strategy now, as both the companies, rivals till Tuesday, had hitherto concentrated on pointing their guns at each other. But they are putting up a brave front. Addressing a conference in Calcutta on Wednesday, HP India president Arun Thiagarajan said a new integration team would be formed to work out strategies for the different product lines and that it would not be ready before seven to eight months.

The marriage may also mean curtains for the Compaq brandname although the company is tight-lipped about this. But if one goes by past experience, like when Compaq took over Digital Equipment, its own fate can be anybody's guess. There are, however, others who feel that this will give the two companies a boost. Says Ravi Sangal, president, idc India: "It has catapulted two organisations to the top. Both have their strengths which, when combined, may prove to be a bigger challenge for competitors than they think." Agrees Vinnie Mehta, president, Manufacturers' Association for Information Technology (mait): "This consolidation will make their product portfolio robust and complete and way above the nearest competitor in India. It will be the most complete company in India now."

But there has been a discordant note from Wall Street. Within hours of the announcement, both the stocks lost heavily with HP touching a five-year low. Such was the hammering that within two days, the price of the deal itself was down by $5 billion, hanging around $19.5 billion on Thursday. This may be a strong signal of the things to come, for, very few high-profile and hi-tech mergers have turned out to be successful ones. Perhaps Carly and her New HP will prove all of us wrong.