May 7, 2002 1:25 PM PDT

HP aims to be king of changing market

The new Hewlett-Packard says it will become the world's premier technology provider, but it admits that the market is slowing.


Chart: The new HP
Which product lines will survive?


In back-to-back speeches at HP's Cupertino, Calif., offices Tuesday, CEO Carly Fiorina and new company President Michael Capellas--formerly Compaq Computer CEO--declared that the new HP will strive to be No. 1 in a variety of markets. But they added that the environment is getting more difficult. The tech industry simply won't grow as fast as in the past, and HP is going to have to keep a lid on costs.

"This is an industry that will be characterized by slowing growth going forward," Fiorina said. "It is an industry that will consolidate. It is an industry that will require sustainable business models. The IT industry will never return to the heady days of 20, 30, 40 percent growth."

To succeed in this sort of environment, HP will have to continue to invest heavily in research and development to differentiate itself, Fiorina said. The company will invest $4 billion a year in R&D, she said. Simultaneously, operating expenses will have to drop to 15 percent to 17 percent of revenue "and not 30 to 40 percent of sales," she said.

The new HP has already started operating, Fiorina announced. The company launched its online shopping site--combining products from both companies--at 3 a.m. PDT Tuesday. The Web site is live in nine different countries and offers 10,000 products.

In the relatively near future, the site will be translated into 21 languages and made available in 72 countries, said Mike Winkler, a former Compaq executive who is now vice president of operations for the new HP. It is already the second-largest direct-marketing Web site in the world, he added.

Taking on the good-cop role, Capellas accented HP's strengths and said the new company will

Hewlett-Packard
at a glance

HQ: Palo Alto, Calif.  
URL: www.hp.com  
CEO: Carly Fiorina  
President: Michael Capellas  
Employees: 150,000  
Annual sales: $74 billion*  
Annual income: $2.6 billion*  
Market cap: $55 billion  
Ticker: HPQ  
Exchange: New York

More:
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* Estimate for fiscal 2002 includes Compaq Computer acquisition
be able to capitalize on current technology transformations. In the future, pictures and video will increasingly become more important and prevalent on the Web, and the trend plays into the company's historical strengths in software, imaging, storage and software, he said.

"We are digitizing the Library of Congress. We are digitizing the great artworks of the Vatican," Capellas said. "The Internet is still going to be the driving technology of the next decade."

HP will also focus on software and services to permit interoperability between Linux, Windows and Unix systems.

Merged, the new HP has already established leadership positions in many markets. HP is No. 1 in overall server revenue, external storage and PCs, and is No. 3 in information technology services.

The two companies came to the merger with complementary strengths, Capellas said. In high-end computing systems, HP has been stronger in the generic commercial market, while Compaq's strengths have been in landing supercomputer contracts and in selling "high availability" systems for banks and stock exchanges. In education, one of the companies was much stronger in K-12, while the other specialized in university contracts.

"It is about having all of the building blocks to lead (the) transformation," Capellas said. "Each of us did things pretty well. None of us did them all."

Many of the benefits of the merger will come from the sheer size of the company, HP executives and others noted. The larger company will receive much larger discounts on components because of volume discounts. Other technology companies will also find the new HP to be an important ally for getting their own technology to market.

"This new HP will become the single largest and most powerful partner in the marketplace" for Intel, Microsoft, SAP, Oracle, Siebel Systems and other companies, Fiorina said. "Each of these players needs a system supplier of our breadth to complement their own value proposition."


Gartner analysts Leslie Fiering and Mark Margevicius say the offering of Compaq products in lieu of HP products as the right move.

see commentary

By combining, the companies will be able to cut costs by $2.5 billion annually, said Bob Wayman, HP's CFO. The savings, to a large degree, will come from layoffs: Roughly $1 billion of the annual savings will result from eliminating redundant administrative, sales and marketing positions, according to a slide shown by Wayman.

Capellas further noted that the combined company will have lower distribution costs, allowing it to better compete against Dell Computer. A larger portion of the company's PC business will go directly to customers rather than through dealers. Most of the direct business will come from large corporations.

Small and medium-sized businesses will continue to buy through dealers. However, HP will enjoy cost savings through improving inventory management. Retail costs will also drop because there will be one, rather than two, distribution systems.

Layoffs will begin soon, Fiorina said. HP will also realize savings by combining duplicative product-development efforts, Wayman said.

Asked if she and Capellas would receive a raise as a result of the merger, Fiorina stated that the compensation committee hasn't met to determine that yet.

While analysts to varying degrees have seen benefits to the merger, the company still faces the challenge of turning the plan into reality. Many of the exact details about the integration have yet to be revealed.

"This was HP's coming-out party," said Alan Promisel, an analyst at market research firm IDC. But "I don't expect HP to divulge its (exact) plans just yet. It's just got out of the clean room."

On a final note, Fiorina added that HP isn't giving up the naming rights to the Compaq Center, a hockey rink in San Jose, Calif., and home of the San Jose Sharks. Instead, it will be rechristened the HP Pavilion, a name shared by HP's home-computer line.

News.com's Ian Fried contributed to this report.

 

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