Why the Compaq-HP merger is all about survival

Despite Wall Street talk of synergies and cost savings, the shock £24bn Compaq-HP merger is about something bigger: survival in a...

Despite Wall Street talk of synergies and cost savings, the shock £24bn Compaq-HP merger is about something bigger: survival in a consolidating industry. By acting now, these firms are guaranteeing their longevity in the post-PC world of services

Assuming regulatory approval, the company created by this merger will:

  • Boast $87bn (£60.1bn) in annual revenue. The newly merged Hewlett-Packard will be second only to IBM - with $90bn - in revenue generated from IT products and services.

  • Be the global leader in servers, imaging and access devices. Product dominance in categories such as Intel-based servers, pocket PCs and digital cameras/printers, will give the combined firm immense power. The new company will also control nearly two-thirds of retail PC sales.

  • Cut $2bn in costs. By eliminating redundant functions between the two firms and cutting the number of contract manufacturing suppliers, the new firm expects to sport a leaner cost structure by 2003, with efficiencies increasing to $2.5bn in 2004.

The will to survive
By any measure, the PC market is suffering, with PC sales falling 10% this year and firms such as Gateway closing unprofitable plants and rationalising product lines. With this merger, Carly Fiorina, the chief executive of HP, and Michael Capellas, the CEO of Compaq, are looking beyond the current downturn. After a nightmarish two years of integration, the new HP will emerge stronger with:

  • One of the few remaining computer businesses. Michael Dell launched a price war this year in an attempt to drive his competitors out of business during the downturn. But the new HP will have the deep pockets required to sustain short-term losses and product diversification, a capability which a stand-alone Dell does not have. The result? The new HP lives to fight on in the era of services and non-PC platforms instead of being stuck fighting for the title of lowest-cost PC-maker.

  • A locked-in $15bn services business. Technology investments have a surprisingly long lifespan - the customers of both HP and Compaq struggle to maintain a wealth of complex legacy technology ranging from old HP 3000 servers to Compaq's OpenVMS operating system. With a combined 65,000 services professionals, the new HP will be in a unique position to retain, satisfy and upsell these customers - something it couldn't do without the merger.

  • A portfolio of important technologies. With the Compaq deal, HP picks up two high-growth product lines - the iPAQ pocket PC and Compaq's no-nonsense storage business - and a gold-plated, non-stop platform business. In five years' time, these technologies will be more profitable than servers and desktop PCs.

Looking to the future
The next two years aren't going to be pretty while HP tries to digest the Compaq acquisition, as anyone who remembers the Compaq-Digital merger can attest to. So what can users do to keep the pain of this acquisition from affecting them?

  • Stay the course for the next nine months. Both Compaq and HP will be aiming for continuity until the merger is finalised in mid-2002. Users should not expect any technology road maps to change during that period, nor should they alter their buying plans. Instead, now is a good time to lock in favourable services deals.

  • Look at the new HP a year from now for infrastructure outsourcing deals. Compaq's services staff will add multi-vendor experience to HP's more proprietary services business. By the time the dust settles on this merger, the new HP will have the staff and skills to handle desktop and multi-vendor networking jobs which IBM Global Services and EDS will not be keen to undertake.

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