September 2, 2002 4:00 AM PDT

HP-Compaq merger: Worth the wait?

Last Labor Day, Hewlett-Packard announced that it was buying rival Compaq Computer in a deal that Compaq CEO Michael Capellas said would "change the basis of competition in the industry." A year later, the jury is still out on whether he was right.
Revisit the merger's high, and low, points.

The combined company still faces many of the same criticisms that were leveled when the deal was announced: Technology mergers rarely work. The deal will be a distraction. Buying Compaq will not help HP strategically in handling IBM's breadth or Dell Computer's more powerful direct-sales model.

While it's too soon to tell if those concerns were accurate, the early results have been mixed.

Since the deal was completed four months ago, HP's revenue has fallen more than the company anticipated. Perhaps more troubling, the merged company continues to lose market share in both PCs and servers, according to IDC.

HP is No. 1 in both markets, according to various studies, but losing ground to competitors. Dell will probably return as the PC king this quarter, according to a Gartner Dataquest report. As for servers, Gartner Dataquest analyst Jeffrey Hewitt isn't optimistic.

"I don't see a pretty picture for the new HP," Hewitt said. "The new HP is steadily declining while their opponents are now on growth paths."

Still, analysts give the company credit for moving quickly to devise product plans for the combined company and avoiding the confusion that eventually derailed Compaq's acquisition of Digital Equipment.

"Rumors of a train wreck have been greatly exaggerated," said Terry Shannon, an editor who's witnessed several mergers, as demonstrated by the ever-changing name of his newsletter: "Shannon Knows DEC," "Shannon Knows Compaq," and now, "Shannon Knows HPC."

Will HP be able to reverse the declines? If so, when?

In an interview last week, Chief Financial Officer Bob Wayman said the company hopes to stop losing market share in PCs and aims to make that business profitable by the first half of next year. HP, though, has not set a profitability deadline for its enterprise systems unit, which includes servers, storage and software. hp chart

In an interview, former Compaq CFO Jeff Clarke brushed off concerns of declining revenue and market-share loss, noting that the company planned, like nearly every company that undertakes a merger, to lose ground in both the PC and server markets as it made product transitions.

"We're quite pleased with our performance," said Clarke, who has shed his role as Compaq's CFO and is now executive vice president of merger integrations at the new HP. He shares the role with Webb McKinney, who headed HP's sales efforts before the merger.

Clarke said that from his perspective, HP has fared better than its top six competitors. Looking at what Wall Street was expecting a year ago compared with what companies have actually delivered, Clarke said HP's peers have delivered on 85 percent of Wall Street's estimates, while HP has delivered on 92 percent.

Bear Stearns analyst Andrew Neff, who, just months before the merger deal was announced, wrote a research note suggesting that HP buy Compaq, said Friday that it is still too soon to say if HP's gamble will pay off.

"The major issue is that most acquisitions are not successful," Neff said, "and we have yet to see signs of turnaround in the operations that (HP) acquired."

When it comes to the details, though, HP has covered its bases. Although the merged company is 16 weeks old, the integration team will remain in place.

"Webb and I are going to be doing this for a year at a minimum," Clarke said.

Language barriers and icebergs
Much of the company's early work has been focused on two areas: minimizing disruption to customers and working to avoid internal culture clashes.

From the early days following the announcement of the merger, HP devoted substantial time in its planning efforts to avoiding the kinds of culture clashes that often accompany large mergers.

The task of managing the clash between the Silicon Valley legend and the Houston-based PC giant fell primarily to Susan Bowick, HP's senior VP of human resources, who had early conversations with HP CEO Carly Fiorina and Capellas to make sure the cultural issues were not overlooked.

Bowick likens mergers to an iceberg. The tip is made up of the sorts of financial goals and organizational structures that always get top billing. But the things below the surface, such as how workers communicate and what words they use, are just as important.

One of the decisions the company made early on--and one Bowick said met with some opposition--was to tell workers of plans to cut 15,000 jobs, or 10 percent of the combined work force.

Those opposed to telling workers argued that if only 10 percent were going to be cut, why make everyone worry for a prolonged period? However, Bowick insisted it was essential to be up front with workers.

"One of the things you want to do is build trust, even if (you're delivering) bad news," Bowick said.

Merger at a glance 
Sept. 3: Hewlett-Packard announces it will buy Compaq Computer in a deal worth $25 billion. CEO Carly Fiorina calls it a "historic day."

Nov. 6: Board member Walter Hewlett says the Hewlett family will oppose the deal. Hewlett calls the strength of the deal "pure fantasy," yet CNET News.com discovers that Hewlett was absent during a board vote over the merger.

Nov. 7: David W. Packard, son of the HP co-founder, announces his opposition to the deal.

Dec. 7: HP's largest shareholder, the David and Lucile Packard Foundation, announces preliminary intent to oppose the deal.

Jan. 31: The European Commission gives a green light to the merger with no conditions.

Feb. 5: Proxy vote for HP shareholders is set for March 19.

Feb. 21: The family feud heats up as the proxy vote looms; both sides state their case in the media.

March 5: Merger gets a big boost with a positive recommendation from

March 19: Based on a preliminary vote, HP declares victory after a proxy vote. The official vote count will take four to six weeks.

March 28: Walter Hewlett files suit against HP, claiming the company improperly garnered votes for its proposed merger from one of its largest shareholders, Deutsche Asset Management. A voicemail from CEO Fiorina fuels rumors of improper dealings.

April 30: A Delaware judge dismisses Hewlett's suit, declaring that Hewlett-Packard's shareholder vote was legal.

May 3: The blockbuster merger, valued at $19 billion, is finally completed.

May 7: HP unveils its combination plans, with product outlines.

Aug 27: Hewlett-Packard releases its first earnings as a combined company.

However, any goodwill created by being open about the number of cuts could erode if HP ultimately finds it has to slash more jobs. That's a prospect that analysis firm Technology Business Research said is likely.

"TBR expects this number may exceed 20,000 employees within a year if the economy does not significantly improve, and may be further complicated should HP experience market share losses due to customer discontent," the company said in a report last week.

For now though, HP is sticking to its original target, with plans to cut 10,000 workers by Nov. 1. Through August, the company has cut 6,400 jobs.

To help organize those that are staying, the company is putting its entire work force through a training dubbed "Fast Start," designed to explain the company's new organizational structure as well as allow workers to confront concerns about their new co-workers.

New image, new attitude?
HP is also trying to solidify its image as a single company. On the day the merger was completed in May, all workers had HP badges as well as access to a unified HP.com e-mail system. Recently, the company had a two-week campaign at its Fremont and Cupertino locations to get rid of Compaq-logo products. Some $80,000 worth of gear was donated to a local charity, including 400 coffee mugs and more than 600 shirts.

Jim Milton, who heads HP's North American sales efforts, said the move was designed to address the Silicon Valley adage, "It's not just a job, it's a wardrobe."

"'Out with the old and in with the new' is very important," Milton said.

Those efforts haven't stopped clashes from emerging, though. One conflict arose between HP's services organization, headed by pre-merger HP workers, and its internal technology unit, headed by former Compaq executives.

At premerger HP, the services unit had primary responsibility over internal technology purchases, which the IT group then implemented. In contrast, Compaq had a more traditional IT organization, which was responsible for both buying decisions and implementation.

Because both HP's services group and Compaq's IT group remained intact after the merger, there was a clash over who was ultimately responsible for what roles.

An HP representative said the issue has now been resolved, with Bob Napier's IT department having ultimate authority over what projects the services group will handle.

There are other, more subtle differences between Compaq and HP that the company is working through. Although HP executives are quick to tout the similarities of HP and Compaq workers within their own business group, both companies had different ways of doing business.

"When you cross businesses, when you cross functions, clearly there are many different ways of getting business done," Clarke said.

Language can be a key stumbling block. Randy Haagens, a worker in HP's storage division recalled an early conversation with some colleagues from pre-merger Compaq in which the word "location" had two different meanings. To the HP workers, "location" referred to an accounting code, while Compaq workers used the word in its more traditional, geographical sense, to indicate their physical location in a building, for example.

In many ways, the new HP is relying heavily on technology to help bridge the differences. The company has created a massive internal computer network designed to be the first place for workers to find out about product plans, expense reimbursement policies and similar tidbits, or simply to put a face to an e-mail or voice mail they've received from a coworker they haven't yet met.

The company, which finds itself more geographically spread out than ever, also relies heavily on conference calls and gatherings over the Internet to connect staff in different locales.

"We've really used the Web as a great tool in this integration," said Clarke, who laments that the Internet wasn't as evolved during Compaq's acquisition of Digital.

Bowick puts it more bluntly: "We're eating our own dog food."

 

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