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HP-Compaq merger stirs investor doubts

By Rob Kaiser Tribune staff reporter Published September 5, 2001

Investors took one look at the proposed marriage of Hewlett-Packard Co. and Compaq Computer Corp.on Tuesday and ran for the exits.

The bold merger--the biggest in computer industryhistory--carries big risks because neither companyhas a good track record in completing deals.Furthermore, analysts said deals born out of brutalprice competition--which many conclude this dealreflects--end up as failures.

"In some sense they were thrown into each others'arms by the market circumstances," said Roger Kay,a computer analyst with research group IDC. "Theyprobably would not have done this if the economywasn't down. They felt they had to do something."

Shares of Hewlett-Packard plunged nearly 19percent, or $4.21, to $18.87, while Compaq's stockdropped 10 percent, or $1.27, to $11.08.

 As analysts fretted about the merger minefield the

two companies must cross, the deal's valueplummeted. What started out Tuesday as a $25billion arrangement, based on Friday's closing prices,ended the trading session as a $20 billion deal.

The frigid response reflected investors' concernsabout whether the companies can overcome pricklyintegration issues and potential antitrust concerns.

Bear Stearns analyst Andrew Neff said the way HPand Compaq have structured their businesses couldmake integration difficult.

Hewlett-Packard is organized in a matrix structure--divided into product groups that draw on centralresources like sales and marketing. In contrast,Compaq's divisional structure gives each productgroup its own self-contained sales and marketingforce.

Integrating matrix and divisional structures is "oftenvery challenging," Neff said.

Concerning antitrust issues, the deal will likely beapproved by U.S. regulators but the companies might

 

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HP deal could trigger more

tech mergers 

September 5, 2001

15,000 job cuts seen in H-P

merger  

September 4, 2001

 A look at the merged

company’s new structure

Graphic

 About th e com pan ies

 About th e com pan ies

 A look at PC market share

 A look at PC market share

On the Web

Current quote: Hewlett-

Packard

Current quote: Compaq

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Microsoft split

Motorola cuts sales

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together 

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forced offline

 affect retail consumers, analysts said.

 A combined HP-Compaq would have 18.7 percent of the market for personal computers and 33.6 percentof the market for PC workstations, according toGartner Dataquest. While the market shares arecompetitive, the companies are Nos. 1 and 2 in retailPC sales. Archrival Dell Computer Corp. holds 15.5percent of the overall PC market, but doesn't sellthrough retailers.

"I see retail specifically as a problem," Reynoldssaid. "When this merger happens, you essentially killone of the two fiercest competitors in the retailspace."

The "new HP," as a company press release put it, isaiming for the high-tech Holy Grail of sellingcompanies suites of hardware, software and servicesto satisfy nearly all of their technology needs. Yetwhile many companies have tried to put together such combinations, only IBM and a few others havesucceeded.

 Analysts remain skeptical that Hewlett-Packard canbreak from the pack.

"We would have concerns about the ability of thecompanies to smoothly integrate the two operationsin view of each company's recent challenges andshortfalls," Neff said.

The combined company will boast market-leadingpositions in PCs, printers and servers, butmanagement will be hard pressed to get thecompanies' cultures to mesh and advance individual

initiatives in the diversified firm.

Both companies have historically had troubleintegrating merged firms.

Compaq purchased pioneering computer companyDigital Equipment Corp. in 1998 for about $9.6 billion.But, after waffling for three years, it finally abandonedDigital's Alpha chip earlier this year in favor of technology from Hewlett-Packard and Intel Corp.

HP's track record is equally spotty, industry experts said. The company has noexperience in major dealmaking, and has long been criticized for a paternalistic

management style that has prevented it from making tough decisions about jobcuts and strategic direction.

The combined company, which will have annual revenue of $87 million, expectscost savings of $2.5 billion in a few years. It will have about 135,000 employeesafter cutting about 15,000 positions.

 Also, Hewlett-Packard didn't comment on its proposed bid of $610 million for bankrupt Comdisco's continuity services unit, which ensures that companies cankeep their computers running in event of disaster. The bid is still subject toapproval from the bankruptcy court.

But analysts said they expect Hewlett-Packard to continue its pursuit of the 

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Rosemont technology firm unit because it fits with HP's strategy to bolster service offerings.

Hewlett-Packard said the merged company will be divided into four units--"access devices" (such as PCs and hand-held computers), imaging and printing,information technology infrastructure and services.

If the company gets distracted by the merger process, analysts said competitorswill pounce.

"Dell right now is feeling pretty good about this," said Gautam Desai, vicepresident of licensing services at Chicago-based Doculabs Inc.

He said Hewlett-Packard's influence will likely curtail any serious push byCompaq into the consumer market, opening the door for Dell and Gateway togain market share.

Given the PC price war, the company is l ikely to steer its efforts away from thatindustry in favor of the higher-margin market for services.

Said Mike Ruettgers, chairman of data-storage giant EMC Corp.: "There is goingto be a lot of confusion between those two companies for probably the next twoyears. Any time you put two huge companies together you are going to get

difficulties."

Observers said the deal shouldn't affect customers.

Most analysts expect the low prices on PCs will remain as the capacity toproduce the machines is higher than demand.

"The PC industry is under the gun," Kay said. "It's very hard to come by revenuegrowth and profits."

Tribune news services contributed to this report.

Copyright © 2001, Chicago Tribune

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