HP/Compaq: Bell rings for round two

Retaining customer and partner loyalty could be as bruising a battle as winning shareholder approval.

As a story it would take some beating by Hollywood: a struggle for power involving two of the largest IT companies in the world; the most powerful woman executive in the US challenged by the heir to a dynasty; a court case involving accusations of improper conduct; and a shareholder vote won by the narrowest of margins.

The eight-month struggle to complete the Hewlett Packard (HP)/Compaq merger may well have lived up to its billing as the most acrimonious take-over battle ever seen in Silicon Valley.

For the new management team, however, it is likely to be just the first round in the even longer struggle of making the new company work in practice, not just on paper.

"You are talking about merging two of the largest companies in the industry. If they are going to make it work they have got to come up with something good, and sooner rather than later," warned Graham Fisher, an analyst at Bloor Research.

It must have seemed a lot easier last September, when Carly Fiorina and Michael Capellas, chief executives of HP and Compaq, announced their intention to create the merged company.

To both of them the logic seemed inescapable: separately the two companies were finding it difficult to compete in the low end against competitors such as Dell and were losing out in the high end against IBM.

By combining, the two companies estimated they would be able to make savings of up to $2.5bn a year, while Compaq's strengths in the Windows NT sector, and the high-end server technology it acquired through its purchases of Tandem and Digital Equipment in the 1990s, would dovetail neatly with HP's strength in the Unix market.

Murmurs of dissent

Unfortunately, others were less keen on the deal. HP's share price fell 22 per cent in the week after the deal was announced. Fiorina was later quoted as saying: "I told the boards the market would hate this deal initially. To be honest, the reaction was a bit more negative than we thought."

While Fiorina was able to convince a large number of institutional shareholders to support the deal, the opposition of Walter Hewlett, a board member and son of one of HP's co-founders, put pressure on the shareholder vote, which Fiorina won by the narrowest of margins.

It led ultimately to last month's court battle where Hewlett claimed that Fiorina had misled shareholders and had brought improper pressure to bear on institutional investors.

The rejection of that suit by a Delaware judge last month allowed the new firm to launch formally on 7 May, and it has already outlined some of the products that will stay, and those which will go.

Early winners include Compaq's Proliant server range and StorageWorks product line, which are strongly positioned in the new company, as is the iPaq handheld line.

The company has said that it is committed to Windows and Linux systems for industry-standard servers, while it will continue at the high-end with systems based on Risc, Unix and OpenVMS.

As expected, HP has set up an enterprise systems group, headed by Peter Blackmore, formerly in charge of services for Compaq, which will look after servers and storage, as well as management software.

HP has stated its intention to be the market leader for Unix servers and Windows- and Linux-based IA-32 servers.

Unix focus

The company's focus in the Unix market will be on HP-UX with Compaq's Unix version, Tru64, looking to be on the way out, although the company has stated that it is committed to incorporating some if its features into HP-UX.

It has also announced that it will port OpenVMS to Itanium as planned. Proliant's gain is at NetServer's expense, with the HP industry standard server being phased out as the company ports its servers to Itanium.

The other business groups will be imaging and printing, which will look after HP's lucrative printing business, services and the personal systems group, covering PCs and handheld devices, as well as emerging markets such as embedded devices and internet appliances.

While the old Compaq has done well on a number of hardware platforms, HP's brands will dominate for software, with the OpenView name kept for management software and the existing HP teams leading in web services and .Net development projects.

Services was one of the important drivers of the merger originally, with HP keen to boost its services strength to compete more effectively with IBM. Fiorina's first attempted acquisition was the consulting arm of PricewaterhouseCoopers, which HP attempted to buy for $18bn in 2000, only to see the deal collapse.

Positive signs

Andy Butler, vice president at Gartner Dataquest, said: "To be honest, I think it has been very positive so far. People weren't expecting [the new HP] to have product road maps in place already.

"The issue now is how quickly they can execute on them. Clearly, you can't have a product group until you've achieved product integration, and to do that you need to have the corporate structure in place, and for the people to know what they're doing."

Which could be where the problems start, of course. When the deal was announced last year, both companies warned that up to 15,000 jobs would be lost as part of the rationalisation and to help achieve the aforementioned $2.5bn savings.

Fisher believes that the total job losses may be closer to 25,000 if the company is to meet its targets.

However many jobs do finally go, the company has to make wholesale redundancies while expecting other staff members to rally round and support it, which is never easy to achieve.

To counter this concern, HP executives pointed to the integration teams involving more than 1,000 people which the two companies set up last year as soon as the deal was announced.

Gartner said that this would be one of the best planned integration moves in the history of the IT industry, although this is not saying much in an industry more noted for its failed mergers than its successes.

Disparate cultures

Many in the Compaq team were already experienced in integrating disparate company cultures following the Digital and Tandem acquisitions, and the management was determined to not repeat the problems faced in those deals.

Not all of these difficulties were internal. Richard Althorp, managing director of reseller Soltec, can remember the problems of switching from being a Digital to a Compaq reseller.

"As a Digital reseller we hadn't had to go through nearly so many hoops for accreditation as we had to when we switched to Compaq," he said.

"HP will need to look at existing resellers to make sure they have the right skill sets and technical know-how to deliver solutions for the new company, not just shift a few boxes."

Box shifting could also be a problem as resellers try to clear existing stock. "When the Digital deal went through, a lot of boxes suddenly appeared on the market at very cheap prices, so HP needs to look out for that as well," explained Althorp.

However, early indications suggest that the channel is prepared to at least give the merger time to succeed.

Fowle play

Gary Fowle, commercial director for distributor Computer 2000, said: "From our perspective we have seen some very promising early signs of what HP is trying to get the new organisation to look like. The way they are aligning their people and products in the channel looks very promising."

"The merger needed to happen," added Althorp. "The industry is heading for a big shake-up and there can be only so many big players. I also think they have learned lessons from the Digital merger and are determined that this one won't be so problematic."

Fowle cautioned against resellers expecting massive change straight away. "In the early days it is not going to be that different to the month before the deal went through," he said.

"The products are going to stay the same for a while, a lot of the same people are going to be in place and so on. What we are hoping to see in the longer term is a more channel-responsive organisation."

What has not happened so far, Fowle insisted, is HP/Compaq losing sales to rival vendors, which was widely predicted when the deal was announced.

"Over the last quarter we just haven't seen any signs of that. Both have had strong periods for us," he said.

In fact, when the new HP formally opened for business on 7 May, Fiorina claimed that the company had won $5.3bn worth of business contracts in the past three months, including $1.5bn worth of services contracts.

Rival companies, unsurprisingly, have been quick to criticise the deal.

Internal politics

Ian Meakin, product marketing manager at Sun Microsystems in the UK, said: "HP has announced its initial product plans, but mega mergers don't happen without a lot of internal politics on the way.

"If you're an existing Compaq or HP Unix customer then sooner or later you are going to have to make changes to your products. That is going to take time, effort and money, and those commodities are all in short supply right now."

The fear in the channel was that Dell would take advantage of the uncertainty generated by the merger and take sales out of the channel altogether.

"If that was going to happen it would have happened eight months ago, when the deal was announced," explained Althorp. "I'm sure Dell did make a few sales on the back of this, but nothing significant."

According to research carried out last year by reseller WStore, existing HP and Compaq customers were supportive of the merger, with 94 per cent saying that they would carry on buying products from the new company as before.

However, six per cent maintained that they were considering buying products from Dell, so the threat is there of sales being lost to the channel, even if it is small.

Support worries

There is also the considerable issue of how much marketing support the company will put into the channel.

Ian Snadden, director of channel sales at Fujitsu Siemens, said: "There is bound to be a reduction in the marketing funds the new company will put into the channel.

"In order to get the most out of the merger, HP will have to make savings, and it stands to reason that resellers which were previously selling both companies' product lines will lose out.

"HP and Compaq resellers I am speaking to are very concerned about this right now, even if most are too scared to say anything publicly."

Butler indicated that the channel can expect to see some "consolidation", but does not believe that it is all going to be bad news.

"I'm coming round to the view that the merger will be good for resellers," he said. "In many cases, HP will be dealing with channel partners which will also be selling products from a vendor such as Sun. HP is going to work very hard to convince them to stick with it."

For HP the first 100 days could be crucial, according to Butler. "Big accounts want to know what their customer relationship model is going to be, and partners want to know what is happening," he explained.

"Most people will accept that you can't turn something like this around overnight, so they'll give them a quarter or two leeway, but after that they will want to see results."

To symbolise the launch of the new HP, on its first day Fiorina ceremonially rang the bell to open trading at the New York Stock Exchange, a long-standing HP customer.

If HP isn't successful in its merger, then she knows who the bell will be tolling for.

SUMMARY:

• HP's acquisition of Compaq was completed after a protracted struggle.
• The first product road maps have been produced, but partners are still waiting to be informed of details relating to direct sales and the channel.
• The company plans to make at least 15,000 job cuts this year.
• Partners and customers are likely to give the new company a grace period of a few months.

REACTION STATIONS

Channel analyst Global Touch released a survey of HP and Compaq's resellers following the close of the merger. More than half of the European respondents said that they felt more confident about the company now that the merger had gone through.

"Europe, Middle East and Africa [EMEA] partners seem more positive about the merger than US resellers," said Denise Sangster, chief executive of Global Touch. "[In the US] Dell is seen by the channel as the key beneficiary."

Some 37 per cent of EMEA resellers feared that the merger would negatively affect their businesses.

"HP's historic channel commitment may be challenged as it integrates business units, rationalises product lines and de-emphasises the two-tier distribution that has been leveraged for more than 10 years," said Sangster.