The HP-Compaq Merger: A Status Report 

12/13/01

The HP Compaq merger seems to be falling apart in front of our eyes so we thought a little analysis and commentary might be in order.  We’ll try to leave the purple prose to the press and settle for some more orderly questions and comments.

We tried to get HP to comment for this story; they turned us (politely) down.  Compaq graciously responded with lots of info and background materials to back up their points.  That can’t help but slant our point of view, so we thought we’d share that information right up front.  Of course, HP’s inability to understand PR as a tool and its failing efforts to “sell” the merger to its various constituencies is very much a part of this story.  But having commented on HP for more than 20 years, we’d have to say this is business as usual for the firm.  We’ve always given them an “A” in engineering and service and at best a B- in marketing.

Never mind why the deal may fail.  Or whether Carly and the HP Board knew that the Hewlett and Packard heirs (and their foundations), with an important 18% of the stock, might not agree to the merger. We’ll leave that to the Monday Morning Quarterbacks. To us the interesting questions are these:

	If the deal does go through, what are the benefits NOW?
	If the deal fails, where does the leave HP?  Compaq?

If The Deal Goes Through What Are The Benefits NOW? 

If Carly and the HP Board manage to squeak through a positive vote (and the feds approve the deal which hasn’t actually happened yet), they will face an HPC (our name for the combined company), which has been tarnished by all the disagreement about whether this is a good deal or not.  That will require more PR and marketing skill than HP can generally muster.  Not much will have changed about the basics, though.

	HP and Compaq will still have to integrate the product lines which will require them to discontinue some products in order to rationalize the product line (and probably to meet federal requirements for approval).  This could lead to some loss of revenue, but probably not a fatal one.
	The companies will require a massive reorganization, integration and cultural change.  This has NEVER been done successfully in the computer industry for a deal of this size.  (See our original article of September 5, 2001 on the deal announcement, http://www.wohl.com/wa0159.htm. The much vaunted HP Way, HP’s culture of engineering, consensus building, and entitlement is ill-suited to meld with the hard-charging sales culture of Compaq.  We predict that if there is a stumbling block to an approved deal successfully executing, this is it.
	Competitors will bombard HP and Compaq customers with reasons to jump ship, just at a time with HPC management is distracted from ordinary business needs like Sales, Marketing, and CRM.  This will occur either while IT customers are still holding onto their budgets (according to current predictions) or just as they’re getting ready to start spending again.

BUT

HPC will be a big company and that’s what HP was looking for.

HPC will have a significant services business, albeit a much smaller one than IBM, and that’s a key goal.

HPC will be a favored vendor in a lot of highly desirable customers’ IT departments – if they can hold onto them.

If The Deal Fails Where Does That Leave HP?

This is Carly’s deal.  We don’t think Carly’s presidency could survive the failure of an HPC merger.

More to the point, HP needs to be bigger and more service oriented to become the kind of company it’s looking to be.  If it looses the Compaq merger this will be the second attempt it’s lost in this regard.  (HP attempted to buy Price, Waterhouse last year.) It will be even harder for HP to come up with a new strategy to enlarge its services business (internal growth just isn’t likely to be fast enough with competitors like IBM so much larger).  But we’d look for HP to try to buy another (smaller) services business. 

HP could reconsider its position in the market and opt for buying itself into a different portfolio (what if it bought Apple?) with a completely different position that better leverage its printing business.

We’d guess that won’t happen.  HP is more likely to lick its wounds, reorganize (again!) and retreat back into the HP Way, building great products that it’s almost impossible to find out about.  Except for those printers.

If The Deal Fails Where Does That Leave Compaq?

Compaq may actually exit a failed merger better off than it was before the attempt.  While officially there is no Plan B, since Compaq remains publicly committed to the merger, according to our off-the-record source, the analysis required for the merger process has provided Compaq with a wealth of information that it can use to better organize and focus a post-merger-attempt Compaq. 

Compaq has written considerable business since the deal was announced, in spite of the September 11 events and the uncertainties around the merger.  They have announced over $2.5 Billion in future business, including substantial deals with the U.S. Post Office, GE Aircraft Engines, GM, Worldspan, and American Express.  Most of these deals are services-led or have a services component.

Changes would clearly be made, mainly in the direction of focusing more on enterprise class product and services, but these were directional threads, which Compaq was already embarked on.  For example, Services is still a part of Sales at Compaq.  It would be better positioned if it reported directly to the CEO, both for a higher profile, and to get away from a mentality where both Compaq and customers think of it as “soft” revenues which can be offered as a kind of discount rather than as a substantial and important separate business.

In The Final Analysis

We think that while this deal theoretically has another three plus months to go or unwind it will, in fact, fall apart much sooner if it’s not going to make it.  Neither company wants to operate under these negative conditions for prolonged periods.  If they both sense the deal is dead, it would be much better to say so and get on with it.

Of course, they’ll both have to agree – otherwise, the guy that speaks first will owe the other a tidy deal termination payout.  That’s unlikely in the extreme.