HP & Compaq: A survival merger

Columnist John Dickinson says the deal is basically a survival merger, designed to keep two companies afloat in the face of a sagging economy and a declining market for technology products.

COMMENTARY-- Question: What do you get when you combine two 400-pound gorillas? Do you get an 800-pound gorilla or a 500-pound chimpanzee?

The proposed merger between Hewlett-Packard and Compaq takes two giant computer companies and makes them into one even more giant computer company with a mathematical market capitalization of $67 billion, and mathematical sales of $91 billion. But what sort of company is it after the merger is done, and what sort of future does it have?

HP-Compaq will have a large PC business--certainly bigger than Dell, which pushed Compaq out of the No. 1 spot only this year. It will also have a server and network infrastructure business, a printer and graphics business, and a corporate IT services business. But expert analysts who have looked at these companies will tell you that none of these businesses is currently very profitable or growing, nor do any of them have much growth or profit potential.

Dell has harried both Hewlett-Packard and Compaq with a PC price war this year that has been all but destructive of all three companies and the entire PC business. Both corporate and retail PC buyers have bought more than enough processor power at cheap prices and the market can arguably be described as "saturated." Even if you toss in the companies' weak handheld businesses, there isn't much potential for growth or profits in the foreseeable future.

The servers and network infrastructure business is fraught with competition from IBM, Sun, Cisco, Intel, Western Digital, and others, and is in a frightfully stagnant mode at the moment because of economic conditions and the downturn in the Internet business. Hewlett-Packard has not had a good time of it in that market for the last couple of years in any case, and Compaq has mismanaged the server market potential of its prior DEC and Tandem acquisitions nearly into oblivion.

Printers and graphics is one area where Hewlett-Packard has shined with innovation and marketing savvy throughout the years. But printers have become a commodity business with almost no margin and little growth potential to speak of, and the big-margin, high-end graphics device business is not known for its sparkling growth potential. HP's efforts at entering newer businesses such as digital cameras have been poorly managed and have met with almost instant failure.

IT services is a tough business, requiring heavy investments in relationship management with large corporate customers. This business is owned by a combination of IBM and the accounting/consulting firms, as well as by an enormous horde of local consultants and value-added resellers. Hewlett-Packard tried to acquire Price-Waterhouse's consulting arm earlier this year, but the deal fell through at about the same time as the company laid off 6,000 employees in an effort to stay afloat, and Compaq failed to leverage DEC's services business when it made that acquisition. It will take powerful marketing strategies and real business leadership to make HP-Compaq's so-far paltry efforts in this business pay off.

HP's Fiorina and Compaq's Capella have made numerous empty statements about how this merger will "accelerate our strategy" or "change the basis of competition in the industry." But size alone will not do much to move an industry that thrives on innovation and growth. There was nothing said--nothing in any of the released material--that indicated plans to grow the combined companies or to make them more profitable. Nothing so far indicates plans to leverage HP's world-class research resources into innovative new products or to expand the company's markets for existing products. And the company's only marketing strategy for pushing back the competition is sheer size, which falls short as a killer strategy in this business.

This is a survival merger, designed to keep these two companies afloat in the face of a sagging economy and a declining market for technology products. It is no more than that and will produce nothing more than an overweight chimpanzee.

John Dickinson has worked in the computer industry for more than 30 years in positions ranging from systems analyst and software engineer to editor, writer, critic and industry analyst. His most recent engagement was at eMachines, where he managed the company's Internet and software business units.