When Carly met Capellas

It was about 18 months ago, in Washington, D.C., and they were sitting next to each other at a public policy conference. At some point during the umpteenth presentation, Compaq CEO Michael Capellas leaned over and whispered in the ear of HP chairman Carly Fiorina.

“Do you find this interesting?” he asked.

“No,” she said, and they both laughed. In that moment a friendship was born, and one of the largest marriages in the history of technology was conceived.

If only the rest of the integration could come so easily. Within two years, we should see the beginnings of an entirely new Hewlett-Packard Co., one that combines considerable hardware expertise with the outsourcing services capability necessary to gain market share in the large enterprise segment. In other words, HP will become IBM.

Compaq should already have managed this with the acquisition of Digital Equipment Corp. Instead, it spent nearly two years confusing its reseller network with mixed messages about its channel strategy, lost interest in developing the Alpha platform and failed to move into any serious competitive position against Big Blue’s Global Services unit.

In the teleconference today, Fiorina and Capellas explained that they looked at each other’s strengths, then the areas they needed to do more work. The comparison showed some strong overlap, so why not join forces? The logic here seems to be that two companies that aren’t particularly good at something might do better if they tackled it together.

Size, however, doesn’t necessarily give the combined entity any advantages. HP wants to expand beyond the nuts-and-bolts support services business into managed IT outsourcing, as does Compaq. The botched merger between PricewaterhouseCooopers and HP that was rumoured to take place earlier this year might have seemed a more sensible step in that direction. Now, however, the union of Compaq and HP will be remarkable only for what each company loses.

Expect the HP Jornada, for example, to give way to the faster-selling Compaq iPaq in the handheld device space. Compaq has already indicated it is less interested in traditional desktops than in the variety of machines by which customers log on to the Internet. This was the trigger for its reorganization around the Access Business Group and the launch of the Evo line of products. Though Compaq hasn’t had much of a chance to build the brand value it gave up when it said it would phase out the Armada and Deskpro series in favour of Evo, it would also make sense for HP to throw its support behind Evo and keep its momentum going.

More significant will be the job losses. Assuming this acquisition is approved, HP will face considerable pressure to eliminate redundancies in the operations of both companies, but it will be some time before it can figure out where these are. In the meantime, more streamlined companies like IBM and Dell will be moving ahead, unencumbered with the burden of figuring out what kind of company they really are. For all their talk of the complementary corporate cultures, morale at both HP and Compaq will both suffer through this process for some time.

For Compaq, the merger ends a long-term identity crisis that began ever since it took over DEC. The integration headaches were clearly the reason behind former president Eckard Pfeiffer’s departure. Since then the company has gone through a slew of management changes that have failed to give the company a clear direction for the future.

Fiorina, on the other hand, proved with her efforts to buy PricewaterhouseCoopers that she understands the importance of services and outsourcing, and despite that deal’s failure she has continued to stick to this agenda. In some respects, HP’s recent purchase of Comdisco’s services arm may prove the more important deal. With Compaq, she has eliminated a competitor but has also inherited a big set of management challenges. Once HP has decided what’s worth keeping, it must market its services more effectively. To do that, it can simply look at an IBM Global Services billboard, which clearly articulates a compelling value proposition that enterprise customers have accepted. Capellas and Fiorina may be better off on the same team, but their challenge will be to prove the combination of their two companies does not simply mean more of the same.

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Shane Schick
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