HP buys Compaq in US$25 billion stock swap

Enterprise customers will see products disappear and increased competition for their services business following a US$25 billion stock swap that will see Hewlett-Packard Co. take over the operations of Compaq Computer Corp.

The companies Tuesday said the agreement, would create an IT company worth approximately US$87 billion per year. Compaq CEO Michael Capellas will join HP as president while HP chairman Carly Fiorina will lead the combined entity. The transaction is expected to close in 2002, subject to regulatory approvals.

HP expects no financial benefits in the first quarter after the closing of the deal, executives said. Some revenue loss is expected through the transition period. Fiorina promised to be aggressive in driving down operational costs, and layoffs are expected in IT and administration, transaction processing personnel and workforce support in IT. Up to 15,000 jobs could be lost, the companies said. “It’s pretty early days yet to see what the impact of this would be on Canada,” said Compaq Canada spokesman Rob Ireland.

Compaq and HP said the organization would be divided into imaging and printing, access business, IT infrastructure and services, but services are likely to be among the most important assets the company will develop. Executives from both firms admitted that they seek to better compete with IBM’s Global Services unit. In 1998, Compaq made what was then the largest purchase in technology history — the US$9.6 billion buyout of Digital Equipment Corp. — to bolster its services capability.

Vito Mabrucco, a former Compaq employee who now works as group vice-president of product and services research at IDC Canada, said Compaq and HP both get most of their current services revenue in the service and support area, while IBM Global Services has a stronger position in the more lucrative outsourced/managed IT services market.

“The combination of the two doesn’t really change that,” he said. “You really haven’t increased each other’s capability on the services side of the equasion by much. It’s marginal at best.”

In a teleconference Tuesday, however, Fiorina said too many people have downplayed the support services business. “Yes, it doesn’t have the same growth opportunities as consulting and outsourcing, but I’ll tell you what a support business does if it’s a good one: It gives you great entree into customers. You’re in there every day, it gives you opportunity to build relationships.”

Joseph Iuso, president of the Canadian Association of Compaq Users, applauded the move.”From our perspective, it’s a bigger install base,” he said. “It allows us to encompass more user groups to be able to offer better services and products.”

Iuso admitted, however, that the group would have to examine overlap between its membership and that of HP’s user groups. The CANACU encompasses many different areas of the market, including a Tandem Users Group in Toronto and a Digital User Group in Calgary and Edmonton.

“The users on the Digital side usually react with somewhat of a pessimistic view,” he said. “They’re not sure what it’s going to do, and if anything (they think) it’s going to be a negative impact. I think that’s a history thing.”

Both Compaq and HP have struggled to expand beyond their traditional PC business as the desktop market became saturated. For Compaq, it has meant increasing its focus on storage and servers. HP competed with Compaq in both areas as well, but also articulated an ongoing theme about the potential growth of e-services in connected mobile devices. Neither strategy, however, has saved the companies from laying off thousands of employees this year.

“We’re trying to integrate in a very difficult overall environment — price competition is fierce, who knows when the economy is going to turn?” Fiorina said. “Synergies are tough to get. They require decisiveness, they require speed, and they require the tough work of taking people out of the business.”

The acquisition will put HP in close second place to IBM in terms of total revenue, but its PC business will continue to face significant competition from Dell Computer Corp. However, Michelle Warren, an analyst with Evans Research Corp. in Toronto, said the company’s data on second-quarter PC shipments indicate HP and Compaq would have led the market in Canada if they had already been merged. “As it was, Dell was No. 1,” she said. “So I’m really curious to see what will happen.”

Capellas said industry experts who have focused on the sluggish PC market are missing the point.

“The question here is not about where the PC business has been, it’s about where the access business will be across the board in creating new categories,” he said. “It’s thinking about the next generation of video streaming, audio streaming and we will ultimately get to the time where you can truly do voice commands on your access device and you really will get to the point where you will do something other than hitting a keyboard.”

The companies face the considerable challenge of eliminating overlap in their product lines without alienating users. IDC Canada’s Mabrucco predicted HP-UX would survive, while some Digital-based offerings would disappear. On the PC side, Evans Research’s Warren said there could be advantages for HP in adopting Compaq’s recently-launched Evo series, which replaced the Deskpro and Armada brands.

“I can see HP keeping it,” she said. “They’re nice machines. The sleeker, kind of snazzy machine will enable a company to price a little bit higher.”

Though Fiorina and Capellas said the two companies shared a similar culture, Mabrucco said they each approached the Canadian market differently. “HP is probably more U.S.-centric in Canada,” he said. “Compaq (Canada) has had a little more independence over time . . . the question is which culture will survive: will it be U.S.-centric or Canadian home-grown?”

Fiorina said HP would seek consulting expertise to help develop the integration plan, though she noted that the two companies already have a similar structure around country management, customer business managers and technical consultant help.

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