Lessons from a giant battle

The merger of computing giants Hewlett-Packard and Compaq was the IT business story of last year. Now a new book, Backfire, lifts...

The merger of computing giants Hewlett-Packard and Compaq was the IT business story of last year. Now a new book, Backfire, lifts the lid on the boardroom deals and courtroom dramas that took place during the high-stakes battle for the soul of the new Hewlett-Packard. Here we print an extract from the book, which is out this week

There were no outward signs of trouble between Walter Hewlett, a member of Hewlett-Packard's board, and the company's chief executive Carly Fiorina in early 2001.However, Hewlett had his concerns about her and about the board, which he felt would not stand up to her.

He says he protested when the board made her chairwoman, arguing it should not hand over so much power to the new chief executive. At one point in early 2001, with the stock price falling, he says she asked the directors to make public statements of support for her. Hewlett says he refused, although he did not tell the board or Fiorina his reasons. "I personally felt it was an inappropriate thing for an employee of the board to do," he says. "She works for us. I didn't do it - and it wasn't because I didn't support Carly."

In May, Fiorina hired the prestigious consulting firm McKinsey to look into HP's strategic options, including a possible acquisition. Various partners were considered, including Xerox. In the end, McKinsey recommended five possibilities:

  • HP could go it alone

  • Pare back anything not related to the printer business

  • Sell off the troubled PC computer business

  • Spin off the printer division to unleash its full value.

Buying Compaq was not among McKinsey's recommendations, say insiders. That was ironic, considering the later deal, but not surprising. HP might be sick from its exposure to the PC business, but Compaq was in intensive care. It had long since lost its market share crown to feisty Texas rival Dell Computer. All told, the company was stuck in a miserable cycle of cost-cutting and lay-offs.

But HP and Compaq would prove many sceptics wrong by putting together by far the most detailed, comprehensive merger plan the industry had ever seen. From the start, HP's board took a hard look at the areas where other companies typically trip up - by failing to eliminate overlapping product lines or ignoring customer service during the transition, for example.

Early on, they assigned respected executives to run an elaborate post-merger integration process. Twenty three separate teams attended to details on everything from computer systems to human resources. Together, they comprised a so-called clean team operation that worked solely on the integration.

Because they would become intimately involved with the other company's data, such as forecasts and pricing schedules, clean team members left their day jobs to avoid antitrust violations. To avoid endless bickering over which products would survive, they took an "adopt-and-go" approach. Whatever problems low-level managers could not resolve on Monday were kicked up to the next level, ultimately going to a six-person committee that included the two chief executives.

The goal was to have as many details as possible finished by the day the merger was launched, right down to making sure a Compaq employee's pay cheque had the HP name printed on it. "We can always improve the boat, but it has got to float when you launch," says Webb McKinney, a 33-year HP veteran in charge of integration on the HP side.

However, there is no guarantee that even the best merger plan will fly - and Compaq and HP's track records in that department were as dismal as that of the 1962 New York Mets. Capellas' management team had learned a lot from cleaning up the Compaq-DEC merger mess. Tandem Computer, while doing well, was operating almost as independently as it had before Compaq bought the company, say sources. As for HP, it had almost nothing to show for its few large deals. Its defensive 1989 purchase of Apollo Computer had done little to slow the rise of Sun Microsystems.

In May 2001, Fiorina had sold off what remained of VeriFone for pennies on the dollar, just two years after Rick Belluzzo had purchased it. Then there was Bluestone Software. HP paid $467m (£319m) for the 500-person company in October 2000, promising to use Bluestone's product to become a leader in internet software. Instead, most of its executives jumped ship as Bluestone got lost within HP's chaotic structure. "I thought it was botched from day one. I don't think HP knows how to integrate companies," says one Bluestone executive. In July 2002, HP discontinued its effort with Bluestone.

None of management's arguments made much of an impact on Hewlett. He had more general reasons for hating the Compaq deal. It didn't really matter how many numbers or studies the McKinsey or Goldman Sachs advisers showed him. The deal was too big, disruptive, and illogical. What sense was there in sharing HP's printer business in order to double up on the size of its PC business?

"I am a mathematician. I know all about numbers," says Hewlett. "You can make numbers say anything you want." In the end, HP would simply be a gargantuan company struggling to churn a profit in lousy businesses. Nonetheless, talks heated up. By early July, Hewlett was getting the impression he was being isolated - easy enough to do, as he was a minority of one.

He missed a teleconference on 10 July, when he was in the Sierra Nevadas. Each year, he played host to 100 or so HP and Agilent employees who rode in the annual Markleeville Death Ride bicycle race at the Hewlett place on Lake Tahoe. He says he had left word where he would be, but a secretary had misunderstood his directions and only left messages for him at his home. Hewlett argues that when no one reached him, the board should have tried his Stanford lab or the secretary who oversaw Bill Hewlett's old office. "They had other numbers, and they never tried them," he says.

Win a copy of the book 

We have three copies of Backfire by Peter Burrows to give away. Simply send an e-mail with your name and address to [email protected] and put Backfire in the header of the e-mail.  Those not lucky enough to win a copy of Backfire can take advantage of a reader offer and buy the book for the reduced price of £16.95. Send an e-mail to [email protected] wiley.co.uk with your request, leaving a contact number and stating that you are a Computer Weekly reader.

Backfire by Peter Burrows is published by Wiley. ISBN 047126765, The hardback costs £20.95

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