HP bags Compaq in bid to take on IBM

Hewlett-Packard is taking over Compaq in a £17bn deal that will create one of the world's largest information technology...

Hewlett-Packard is taking over Compaq in a £17bn deal that will create one of the world's largest information technology companies.

The merged organisation's combined annual sales topped £60bn last year, slightly behind IBM, which reported total sales of £63bn in the last four quarters.

The companies make a good fit across the product range, according to Ian Bertram, regional director of hardware platforms at analyst group Gartner Dataquest's Asia-Pacific unit.

"At the high end, they don't compete head to head. Their competition is IBM and Sun," he said. "In the PC market they fight against Dell and in handhelds against Palm. But there will still have to be a huge rationalisation of the product line and the branding."

The new HP will have four main divisions:

  • The Access Devices division will be the largest, with estimated sales of £20bn.

  • The IT Infrastructure division will include the company's servers, storage and software operations and have estimated revenues of £18bn.

  • The Imaging and Printing division will have estimated revenues of £14bn.

  • The smallest division in revenue terms will be the Services business, but it will employ some 65,000 staff, almost half the workforce of the combined companies.

This services division will be the key for the new organisation, according to Bertram.

"The big question is whether they can achieve critical mass [in the services business]," he said. "Compaq has been unable to grow its services business despite buying Digital, while HP has been trying to grow organically. Do two struggling services companies equal a good business model?"

In a joint statement issued by both companies, HP's chief executive officer Carly Fiorina called the acquisition a "decisive move", and said it will provide "significant cost-structure improvements".

The improvements will come as the company cuts product lines, manufacturing and distribution systems made obsolete by the merger. In total, the deal is expected to create savings of £1.4bn in 2003 and £1.75bn by mid-fiscal 2004, the statement said.

The merger is certain to produce wide-scale job losses as duplicated positions are merged. The companies have a combined payroll of 145,000 people in 160 countries.

HP and Compaq have not yet said where the job cuts are likely to occur, but the new company will remain at HP's headquarters in Palo Alto. A "significant presence" will also be retained in Houston, Compaq's current headquarters.

Carly Fiorina will retain her position of chief executive officer while Michael Capellas, the chairman and chief executive officer of Compaq, will be president. Four additional board members from Compaq will join Capellas on the board of HP.

"There is going to be a lot of trepidation among the troops," said Gartner's Bertram. "All the employees in duplicated positions will be looking over their shoulders, and will effectively have to apply for their jobs again. This will have to be done in a fair and equitable way, which will take a long time."

Some manufacturing plants belonging to the two companies are likely to close as well, as part of an overall rationalisation process that will take between 12 and 18 months, Bertram said.

"This will also be devastating for some distributors and resellers, particularly those who deal exclusively in either company's products," Bertram noted.

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