Was It Good For You Too? Maybe

If anyone says he expected this, biff him: he’s lying. Sure, one analyst
had said that HP should buy Compaq, but then, after every merger, you’ll find
an astrologer who foresaw it. On September 4, reactions in the IT industry
ranged from surprise to shock, and that included HP and Compaq employees.

Other mergers in the past have been surprises: AOL-Time Warner,
Compaq-Digital. But usually, we’ve been able to sit back later and say, well,
yes, that was quite logical. That did not happen here. Compaq "lived fast
and died young", said one analyst, and HP stock crashed by 20%. Even though
the "new HP" will be a $87-billion giant nearly rivaling IBM.

Sure, this is good for a struggling, red-inked Compaq. But is it good for HP
too? Why did Carly Fiorina do it?

There is no one reason. HP and Compaq are not complementary. Well, not
entirely. HP does dominate peripherals, and Compaq is a (handheld, desktop and
server) PC powerhouse, with special strengths in retail, even after losing most
top slots to Dell. The merged entity would sell three-fourths of the retail PCs
in US stores. Yet, Dell’s rejoicing, and Gateway says it’s "cool".
For in these tough times, the new HP will be busy merging for six months, rather
than fighting the competition. And retail ops do not make money. Dell remains
efficient, profitable and on top. Nor is there any big gain in servers.

The only good reasons are to do with customers and services.

The merged entity gets the combined customer base of HP and Compaq. After
knocking off common product lines and over 15,000 staff, that means, for the two
together, a fair-size drop in costs for a marginal decline in revenues.

Services are where HP wants to take on IBM’s very profitable $-26 billion
business–not including the $13 billion in IBM software revenues with over 80%
gross margin.

HP desperately needs services revenues, and it gets those customers now.
Headed by Ann Livermore, who nearly became CEO until the board chose Fiorina,
this division gets 40,000 Compaq pros, taking it to 65,000 people. At $11
billion, it’s less than half of IBM’s size, and it will stay largely in
low-margin hardware maintenance. Still, this is a steady cash flow, with much
better margins than hardware.

Despite the analyst pessimism, it could work. If customers stay, product
lines are rapidly trimmed, layoffs happen smoothly, services ramp up, and the
mother of all employee integrations goes off well. That’s a lot of ifs and
gambles for one very cautious Silicon Valley giant. For now, investors and
analysts aren’t cutting it much slack.

Prasanto Kumar Roy