Compaq merger could cost HP $10bn

The gloomy analysts are circling...
Written by Suzanna Kerridge, Contributor on

The gloomy analysts are circling...

HP is in danger of losing $10bn when it takes over Compaq. HP itself has admitted that it's risking as much as E4.6bn (£2.8bn) - five per cent of annual revenue - as it merges product lines and consolidates business units. But industry observers and shareholders think the figure could be much higher than this. Mitul Mehta, managing director at research firm TekPlus, said: "I don't think five per cent is realistic. It will be a lot higher." Clive Longbottom, analyst at Quo Circa, estimated the losses could even be more than 10 per cent. "If you look at the hit taken through redundancies and golden shackles to keep key personnel, as well as the other considerations, you are looking at about $10bn." The personalities chosen to run the newly formed divisions will be decisive in how much revenue is lost, according to Mehta. "The big problem I have is not the different management cultures but whether the management experience is enough not to get the company bogged down in the nitty-gritty. I have doubts at divisional levels as to whether the management is right." Longbottom agreed: "Carly wants HP to play at the same level as IBM - she is aiming for the boardroom, not just the IT director. She understands what the problems are but is blinded by the idea that Compaq bought Digital for high-level skills and if she buys Compaq then she'll have those skills. But all the high level skills left just after the Digital deal. Carly is buying dead wood." Soon after the merger was announced doubts were expressed by the shareholders and industry analysts as to the suitability of Carly Fiorina to run HP. However, Longbottom claimed Compaq CEO Michael Capellas will be the one to leave. "Capellas knows he'll be the one to be given the biggest job title and then after six months he'll take the money and run. He has the least to lose," Longbottom concluded. But all is not lost, at least as far as Mehta is concerned: "The server business is quite low and if the deal goes through I expect them to consolidate lines and to integrate HP's OpenView across the board as there is a lot of profitability in it. There is a lot to play for in the area of smart appliances, especially handhelds where Compaq are very strong. But if they leverage all these elements they can make an almost immediate profit. "There are enough elements to pull out from both sides to make it a sound deal."
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