Alternate Universe: HP doesn’t buy Compaq

It was almost three years that HP chief executive Carley Fiorina sent an e-mail message to employees announcing the company’s intention to merge with Compaq in a deal she said would provide customers with “”more choice, more freedom, and more flexibility.””

What was to become the biggest high-tech

merger brought on an equally formidable proxy battle. Against the backdrop of a weak IT market, falling share prices, and plummeting employee morale HP’s CEO steered the deal through the storm of disgruntled investors, led by Walter Hewlett, the son of the company’s co-founder.

The jury may still be out on the HP/Compaq merger, with the final verdict to be drawn when the IT sector has had a chance to fully recover. But one point that both sides of the dispute can agree on, is that HP will never be the same again.

In the wake of the second anniversary of the deal’s approval, spoke to five players in the IT sector and asked if they would weigh in on the HP/Compaq deal and give their perspective on what the IT sector may have been like if the merger had not happened.

Peter Burrows, author of Backfire: Carly Fiorina’s High-Stakes Battle for the Soul of Hewlett-Packard: Well, I think Compaq would probably still be struggling along. I don’t know that anyone else would have bought them. Everybody in the computer business was struggling other than Dell. But I think that HP would probably be a more profitable company if it had less hardware.

Bernard Wolf, professor of Economics and International Business. Schulich School of Business,York University: Now, of course, it is kind of difficult to say what would have happened otherwise, since the otherwise no longer exists. But I think that because of the nature of the industry, you do clearly have some economies of scale in terms of research and in terms of marketing and such that are helpful in keeping costs down, in allowing you perhaps to innovate more rapidly, and more successfully.

Harry Zarek, president, Compugen: It is hard to predict, but I think what would have happened if you look at HP before, they really had what I call marginally critical mass, probably less than critical mass in some of the key markets. What probably would have happened is a much bigger dependence on their laser printers, their hard-copy business, where they clearly have a dominant position.

Mario Babineau, Canadian Association of HP/Compaq Users: I would say that if the merger would not have happened, those people who use what we would call mainframe-type servers or different operating systems other than Windows, those people would have started looking for a new direction on what to do. Because those products were not well supported, and I believe Compaq would have dropped them.

Larry Noble, president, Evron Computer Systems Corp, Markham Ont.:They both have good products, so it is not a question or problem with products. I don’t think the merger improved the product line. It just meant that they had, and they continue to have good products. The major price driver is Dell.

Babineau: If they didn’t merge I believe Compaq would still have done fairly well on the PC side. I think the battle that what HP and Compaq were doing was not as much for the PC side as for the server side and stuff like that. They were fighting to be able to grasp some part of the market there.

Zarek: Compaq, while they were having some success in the enterprise, they were not fully accepted, they were starting to do that with the Digital acquisition (Compaq acquired Digital Equipment Corp. in 1998). They might have got through that, but they were struggling with profitability.

Burrows: You know, what they got from Compaq was kind of commodity hardware. Like desktop PCs for business. That is a lousy business, and so they kind of added in the worst place. They got a big, unprofitable difficult business. And it is going to be very tough for them to compete with Dell there.

Babineau: Probably HP would have been affected in that now, with the merger, they have a product where they can actually go and sell the hardware and the OS to go with it, which they were not able to do before.

Zarek: (HP) had niches in the server area and in the storage area. But they certainly would not have been a full-service, broad-based technology provider. If I think about their services capability at the time, again that also was fairly narrowly focused, very very specific to certain industry segments, so that would have been limited.

Burrows: I think if they had just continued to do what they were doing, that wouldn’t have been smart. I think they could have focused more on areas where they could really innovate and use their strengths. I think if they would have focused on the consumer, which is by the way the part of the industry that has done incredibly well.

Wolf: I didn’t think that (the merger) was absolutely necessary. Neither company was going to go bankrupt. In the short term, all these mergers have difficulties in terms of combining cultures, combining personel, combining systems, combining whatever . And to become more efficient, then in fact there are very considerable transaction costs involved.

Noble: The net result from our point of view is that there is just one less player in the market. As a reseller, it is now down to two, for all intents and purposes, IBM and HP.

Babineau: Now that HP took it over I’m feeling that it is more stable, and we are staying with it.

Zarek: I would say in hindsight the market would have forced some type of other coalescence and it might not have been those two. One of them might have broken up into pieces that someone else would have picked up. So I would have to say it would have been a much messier situation than it has, in fact, turned out to be.


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