The HP-Compaq Merger:  HP Wants You To Love Them

12/21/01

HP is worried, concerned that bad publicity, the opposition of the heirs of Bill Hewlett and David Packard and the foundations they endowed (representing 18% of the stock of HP), and the worst marketing job you’ve seen in a long time, is going to deep six their merger with Compaq. 

They should be.

	The street isn’t so sure this is a good deal.
	Compaq looks like it could do fine without them; they got two great outsourcing deals this week – Raytheon for $200-250 million, Ericsson for $150 million.  They beat out HP to get them.

Wednesday, HP held its second analyst briefing in a week, this time offering up CFO’s Bob Wayman and John Clarke to present a 49-page document filed with the SEC and to fend up questions seeking to read the financial entrails.  Actually, they were polite and reasonably candid, but the material speaks for itself.  HP is playing a very tired old game:

So let’s see. 

The scale is all wrong.  We talked in our original article on September 5th http://www.wohl.com/wa0159.htm  about the fact that the only high tech acquisitions that seem to work are the small ones like some of these.

HP keeps saying it will be fine managing this merger into an $80+ billion company because it just managed the complex spin-off of Agilent.  Should we note that complexity is not the only thing going on here?  Spinning something off, with its culture intact, is very different than joining two companies together, rationalizing their product lines, eliminating 15,000 jobs, and somehow melding their very dissimilar cultures.

Thursday, HP bought a two-page ad in the WSJ (Wall Street Journal), supposedly to reach its customers.  It certainly needs to convince customers and investors to support the HPC deal.  The WSJ went out and interviewed some customers.  Contrary to what HP says, not all of them think the merger is a great idea.  As you’d guess, some like it; some don’t.  Historically, when two companies merge, some of their customers don’t wait to see how it will turn out, they accept an attractive counter-offer from a competitor and, believe us, the competitors will be standing in line, dangling lots of bait. 

Other ads, denigrating the founders’ families’ dissent appeared in the New York Times and the San Jose Mercury.  In an article in Silicon Valley.com, http://www.siliconvalley.com/docs/news/ svfront/hp122101.htm, David W. Packard pointed out that a rejection of a specific merger proposal does not in any way imply an opposition to change itself.  He slammed the current deal as assuming "massive layoffs, synergies, economies of scale . . . can substitute for HP's traditional pattern of sustained innovation by talented employees who trust that their future is aligned with the future of the company. This is one change that I personally consider too risky to support.''

We thought it would be interesting to show you the copy from the WSJ ad and offer some commentary of our own.  Our comments are the ones that are led by the double dashes (--).

HP: Because the combined customers of HP and Compaq will represent a vast and newly powerful community of technology users.

--  Opinions:  To the extent that you can keep them.  We’d guess you should expect to loose at least 10-15% in the merger process.  Sun Chief Executive Scott McNealy quips that part of Sun’s plan to cope with the recession is "just answer the phone calls from HP and Compaq customers.”

HP: Because on their behalf we will lead the technology transitions ahead.

--  Opinions:  I guess you can hope to.  We haven’t noticed that HP or Compaq did this very often in the past.  Will HPC be able to keep management distractions at a level where they can spot the transitions, much less lead them?

HP: Because in one strategic move, we will become market leaders in servers, in storage and in management software -- the essentials of business infrastructure, where leadership really counts.

--  Opinions:  We agree that HPC would be a major factor in the server and storage markets, both of which are highly competitive. We don’t even think of Compaq or HP as Management Software vendors.  And, by the way boys, in your very own SEC filing, you said you anticipated a Revenue Loss of 11% for Unix servers (for customer and product overlaps) and 6% for NT servers – that’s going to translate to a lot of Management Software since you’d likely need to be selling hardware to sell software.

HP:  Because we will greatly strengthen our depth and breadth of technology solutions at a time when customers demand integrated, end-to-end solutions.

--  Opinions:  Neither HP nor Compaq is itself a major solution provider.  Solutions for these vendors are provided by software and systems integration partners who are, by the way, the very same partners who work with all of HPC’s competitors.

HP:  Because we will double the number of consulting, outsourcing and support professionals dedicated to helping customers do business around the globe.

--  Opinions:  Oh, yes.  All the way from a 1% market share to a 2% market share.  And that assumes HPC has no revenue loss in services.  They make that claim based on the fact that most of the current HP and Compaq service revenue is for maintenance, not the higher priced (and more competitively marketed) services such as consulting and outsourcing.  Maintenance is also the service revenue that is directly tied to how many boxes you sell, so while their current service revenues are safe for a little while, they should expect to see loss in future maintenance-related service revenues, based on their own calculations.

HP:  Because more inventors and engineers will be focused on solving the toughest technology challenges of our times -- together.

--  Opinions:  We are of the opinion that small, very focused teams do most of the original, innovative work in this industry.  Aha! doesn’t happen in a committee.  Invention is not something that can be managed; on the other hand engineering, something HP is very good at, can be.

HP:  Because combined we will lead the march toward open standards more effectively than either company could on its own.

--  Opinions:  Yes, this is certainly true.  HP has been a good friend of Open Standards in recent years and having more market share, technical expertise, and customers on your side can only help.

HP:  Because we will accelerate the changes required to improve our PC business, so we can offer customers a more competitive alternative.

--  Opinions:  I’d argue that you’d be better off getting out of the PC business where vendors may soon be giving away razors for the chance to make money on the razor blades (Maintenance? Support? Peripherals? Software? Web-based content and services?).

HP:  Because the best way to protect and grow our leadership in printing and imaging is to strengthen our enterprise computing, IT services and PC businesses.

--  Opinions:  Actually, this is a really great question.  One suggestion that’s been made is that HP sells its computer systems business and concentrate on its printing and imaging businesses.  These businesses are much more profitable and HP has huge market share and brand recognition.  But we don’t suppose HP is looking for that kind of strategy.

HP:  Because we intend to do all that and still decrease expenses $2.5 billion by 2004.

--  Opinions:  With good discipline, this might be possible.  But we think the point of a merger should be growing the bottom line not cutting expenses.  Of course, doing both would be optimal.

HP:  Because for our employees, customers and shareowners, we will be a stronger, more vibrant HP, better conformed to lead and grow under market conditions that will demand unprecedented integration, breadth and flexibility.

--Opinions:  We can see that HP management thinks this deal is good for the HP stakeholders.  We can also see that there is considerable disagreement about this within that stakeholder community.

HP:  Because in our industry, to stand still is to fall behind.

--  Opinions:  We agree.

HP:  Because this is the exact opposite of that.

--  Opinions:  We disagree.  It’s only true if the deal goes through and the execution goes as you have planned.  We don’t think that’s likely to happen.  But anything’s possible.

If you’d like to read another point of view on HP’s PR campaign, try Theresa Poletti’s column on the subject in Silicon Valley.com, http://www.siliconvalley.com/docs/news/svfront/ hp122001.htm.   

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