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Follow UsWhen the going gets tough, the tough go shopping. But no one
expected HP chairman and CEO Carly Fiorina to step out with such a huge shopping
bag. Palo Alto-based HP’s acquisition of Compaq in a $25-billion share swap
deal is one of the biggest in recent infotech. It was also one of the industry’s
best-kept secrets. Of course, the deal still needs clearance from the European
Union and the US Justice department.
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In April this year, Webb McKinney, HP vice-president for
personal computing products, was quoted in an interview as having said, "It
is hard to find a successful example of one PC company buying another. The
reality is that you can’t really buy a customer. By and large, consolidation
should be done the old-fashioned way–by gaining marketshare."
Barely a week ago, Compaq executive V-P (global business
unit) was quoted as having said, "The Big Four–Compaq, Dell, HP and IBM–will
continue to survive and grow. The others are in question." Yet, here we
are. Compaq is gone and no one seems more surprised than its employees
themselves. If it was meant to be a surprise, it worked remarkably well.
But the question is–is it a pleasant surprise?
Apparently not. At least, not the way analysts and investors
at the New York Stock Exchange see it. Sample a few headlines from post-merger
analyst reports: ‘A train wreck in slow motion?’. ‘A survival merger’.
‘Compaq: Lived Fast, Died Young’. As for investors, HP shares fell by 19%
after the merger announcement, their biggest drop since 1987.
So why did HP decide to take over Compaq? Fiorina has
outlined three major reasons for the merger:
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Cost structure improvements;
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Synergies arising out of complementary organizations and
product families; and -
Access to new growth opportunities.
Let’s look briefly at these three reasons–do they add up
to a big $25-billion reason?
Saving bucks, but at what cost?
Most analysts believe the merger will lead to certain cost
improvements. But the question is how much and at what price? Streamlining two
bureaucracies and cutting out duplicate back-end jobs in finance and support
will save money, but not enough to warrant $25 billion. A great deal of the
cost-cutting will come from eliminating competitive product families and the
front-end jobs that go with them. HP has already announced 15,000 job cuts from
the combined entity. At the time of going to press, it wasn’t clear if these
would include the earlier job cuts announced separately by HP (9,000) and Compaq
(8,500). Either way, Fiorana declared that the merger would lead to cost
synergies of $2.5 billion per year by 2004.
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After the Merger: The New HP in |
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| Â | Compaq | HP | New HP | Sun | IBM |
| Desktops | 856 | 465 | 1,321 | — | 347 |
| Services | 224 | — | 224 | — | 774 |
| Workstations | 48 | 60 | 108 | 95 | 23 |
| Unix Servers | 224 | 220 | 444 | 373 | 138 |
| Portables | 158 | 12 | 171 | — | 119 |
| PC servers | 252 | 95 | 347 | — | 126 |
| Printers | — | 460 | 460 | — | — |
| Packaged SW | — | — | — | — | 81 |
| Software* | 184 | 165 | 349 | — | — |
| Others | — | 226 | 226 | 50 | 48 |
| Total | 1,945 | 1,705 | 3,650 | 518 | 1,662 |
| Total revenues: Rs 1,945 + Rs 1,705 = Rs 3,650 |
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| * Digital GlobalSoft, HP ISO, All figures in Rs crore |
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Even then, the cost advantage is far from absolute. If the
idea is to deal with Dell’s price wars, the real cost improvements should come
from lower manufacturing costs. The merger does not guarantee that. Dell gets
its cost advantage from direct selling, and its made-to-order strategy. At the
moment, neither HP nor Compaq are geared for that. More importantly, both
companies have had different manufacturing philosophies (HP does 100%
outsourcing, while Compaq has been trying to shift to its own assembling) and
there is no clear direction on which, if either, of these will take precedence.
Together, HP and Compaq edge out Dell in the PC business. But the law of
diminishing returns has already kicked into the PC business. There is only so
much to be had out of volumes. The bottomline issue will be: "Does the
merger help the new HP make and sell computers at better margins than
before?" In the current market scenario, not really.
Complementary, competing or contrary
Fiorina’s next big stated reason is the existence of
complementary product lines from two complementary organizations. But are they?
To an extent, yes. One argument is that the new entity would
do well to go with Compaq product lines in the consumer segment (its Intel-based
systems) and HP’s product families in the server and corporate business
sectors. Despite this, there are huge overlaps between the two product families.
Globally, systems (PCs, servers and notebooks) have contributed to a third of HP’s
revenues and to almost half of Compaq’s earnings.
Their Unix server businesses are similar. Both have
proprietary RISC processors and architectures–HP’s 9000 and Compaq’s
Alpha. And both have announced a graded shift to the Intel’s 64-bit Itanium
processor. So some product lines will have to go. Even so, PCs will continue to
be the combined entity’s major revenue earner at a time when prices are
plummeting and unit sales are declining.
As far as the nature of the two organizations is concerned,
‘different’ is perhaps a more appropriate word than complementary. HP is
know for its consensus-driven "HP way", while Compaq comes with a
history of an aggressive target-driven work culture.
Charting new waters
What HP will really be gaining out of the deal is access to
Compaq’s services and consulting businesses. Globally, Compaq gets 23% of its
services revenues from services (13% in India). That and peripherals are really
where the synergies lie. HP has been itching to get into the consulting and
services business for a long time now. Late last year, Fiorina almost pulled off
the acquisition of PriceWaterhouse—Cooper’s consulting arm, but the deal
fell through at the last moment.
| What happens in India? |
| A fortnight before the merger announcement, Compaq India chief Balu Doraisamy returned from Houston, having stopped over at the headquarters after his annual vacation in the US. But if he came back with even an inkling of the merger, he kept it very close to his chest. Compaq India employees woke up on the morning of September 4 and heard of the merger on the morning news, along with the rest of the world. If this was meant to be a surprise for everyone, it certainly was. The first reactions were one of horror. They remembered what happened Their fears are not unfounded. One of the reasons stated for the The up side is that the combined entity now becomes the clear # 1 IT The crucial issue however, involves the logistics of the merger. There It is significant that locally, Compaq comes from a position of For the moment, however, no one utters a word. All communication with |
Now, HP gains entry into that segment through Compaq. But to
ask the same question again, is that the $25-billion reason? The jury is going
to be out on this for a long time. Much of Compaq’s services revenues come
from hardware–a slow growth rate sector with low margins ranging from 12% to
16%.
Then why?
There are some visible gains from the merger. It makes HP a
one-stop shop for systems, peripherals, storage and services. To the extent that
economies of scale will work after the laws of diminishing returns have kicked
in, some cost advantage, especially after post-product rationalization. More
muscle for the PC and PC server wars. And to the extent that customer loyalty
works–a larger customer base.
But the real issue is the pay-off. What will all of this
cost HP?
In the short run, a merger of this magnitude will take up a
huge amount of management bandwidth. Two years ago, when Compaq took over
Digital, Dell rejoiced. It believed that the takeover had diverted Compaq’s
focus just enough to give them a big window of opportunity. This merger, in
sheer dollar terms, is almost thrice as big. Bigger if one looks at the
logistics involved. So while HP-Compaq go about deciding who stays and who goes,
Dell will hog the market.
The history of mergers and acquisitions in this industry hasn’t
been very encouraging. Remember IBM’s take-over of Lotus? AT&T’s buyout
of TCI? Or for that matter, Compaq’s acquisition of Digital and Tandem? Who
hears of VAXes and VMS and Tandem, at one time the best fault-tolerant systems
in the world anymore? And what Microsoft does to companies and products it takes
over is a whole new story.
One could argue that the dying out of technologies is part of
the evolution game. Or that they just get incorporated into the new paradigm.
Perhaps. But quite often, the best is also lost with the worst. Either way, for
those given to nostalgia, despite the promises, Compaq as a brand might cease to
exist by next year.
Besides, in no merger does one plus one make two. More often,
marketshare of the combined entity actually decreases after a merger (a classic
example being what Coke did to Thums Up in India). How quickly–or how slowly–that
share will ramp up again will depend entirely on the integration strategies the
company adopts.
Sarita Rani in Bangalore
What’s up with the competition?
with the competition?
market, it is pretty much Dell versus the Rest. Some of these equations
will change after the merger–but not many. Here’s a brief look at what
the competition is up to:
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IBM: Despite a slow growth rate, IBM earned $13.6 billion
from server sales at the end of FY 2000 and was the dominant player in
the market. The merger, however, puts IBM in second place. The company
had pulled out the Aptiva from US retail stores in 1999 even though it
continues to sell its consumer desktops directly. On the whole,
worldwide PC shipments from IBM were down 6% compared to Dell’s
growth of 15% during the year. Analysts have been prodding IBM to give
up the PC business entirely in favor of a greater focus on software
and services. -
SUN: Was number 2 in worldwide server sales. Revenues from
the Unix server business grew from $7.3 billion to $10.3 billion as
the company beat Compaq to move up the rankings and nip at IBM’s
heels. Remains focused on its product line and architecture though how
far that philosophy will carry it, is difficult to say. -
DELL: The root of the whole trouble. Dell ousted Compaq in PC
sales this April–leading to the first overthrow in PC rankings in 7
years. It also unleashed a grueling price war that has forced
competitors to slash their own prices and hit their bottom lines. It
rejoiced when Compaq took over Digital in 1998 saying the process had
diverted Compaq just enough to give Dell the edge. By all accounts,
preparing to rejoice again. -
GATEWAY: In trouble. Is attempting to revamp itself as a
US-only PC company and in the process has made substantial cutbacks.
These include a recent announcement that it will slash a quarter of
its workforce, close a US manufacturing plant, several call centers
and its Asian operations. Analysts’ recommendations to Gateway in
recent times: sell out to Dell.
| Requiem For A Company |
| Few but the very old-timers remember what COMPAQ stood for and how the company got its name. As pioneers of the first IBM PC Compatibles in 1982, the company drew its name from two words that described its new product and also formed its first tag line–COMPAtibility (with the IBM PC) and Quality. A lot of water has flown under the bridge since then to its last tag line - Inspiration Technology. Here’s a brief run-down of the company’s landmarks in history:
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