"New" HP set to rule in Asia

The biggest PC manufacturer in Asia is not Compaq, IBM or Dell, but China's Legend Computer. Not for much longer, say analysts
Written by Fran Foo, Contributor

The merged entity of Hewlett-Packard and Compaq is set to be Asia Pacific's leading hardware vendor, Gartner Dataquest said today.

Early this morning, HP said that it would acquire Compaq in a stock swap worth about US$25bn (£17.5bn). The deal, one of the largest in technology history, would merge two of the biggest names in computers, printers and computer servers, and would have total revenue only slightly less than IBM, the largest computer company.

"Based on historical figures (excluding Japan), the merged entity will be No.1 in Asia Pacific in terms of PC shipments...knocking off China's Legend Computer," said Ian Bertram, Gartner Dataquest Asia Pacific regional director (Hardware Platforms).

Latest Dataquest statistics in the second quarter revealed that Compaq was in third place with 354,747 PC units shipped while HP was bumped into sixth position by Dell Computer.

Also in the past quarter, Compaq was in pole position for servers with a 21 percent market share across Asia Pacific, Dataquest said. IBM was in second place with 18 percent while HP was third with 16 percent.

"Basically, the Asia Pacific market can't get any bigger. It will be interesting to see how they (merged entity) rationalize their existing product lines and if they can create critical mass," Bertram said.

"From a hardware perspective in the region, Compaq has a stronger strategy and execution as compared with HP," he added.

HP has manufacturing plants in Singapore, Japan and China while Compaq has similar facilities in Australia, India and the Republic.

Carleton Fiorina, the chairman and chief executive of HP, will become the new company's chairman and chief executive, while Compaq chairman and chief executive Michael Capellas will become president of the new entity. Capellas and four other Compaq board members will join HP's board.

The deal was approved unanimously by both companies' boards of directors. Compaq shareholders will receive 0.6325 of newly issued HP shares for each share of Compaq. HP shareholders will own 64 percent and Compaq shareholders will own 36 percent of the combined company.

The merged entity will be based in Palo Alto, California, HP's hometown, and retain a "significant presense" in Houston, where Compaq is headquartered.

HP said the acquisition is expected to generate "cost synergies" totalling about US$2.5bn annually. The combined companies will have operations in more than 160 countries and employ more than 145,000 workers.

But analysts speculated that layoffs were inevitable. They also suggested that the deal would be closely scrutinized by regulators, including the US Justice Department.

Dataquest's Bertram said that anywhere between 15,000 and 20,000 positions worldwide could be eliminated. "The question is whether those cuts -- across 160 countries and various manufacturing facilities -- will be sufficient," he said.

HP employs 14,000 people in Asia Pacific (including Japan) while Compaq has 3,000 employees in the region (exluding Japan and Greater China).

The printer maker has cut 7,000 positions globally to date while Compaq has reduced 8,500 positions since January.

Singapore is the regional office for Compaq while HP is regionally headquartered in Hong Kong. However, Siaou-Sze Lien, HP's Asia Pacific vice president and managing director, is based in the Republic.

It's still to early to tell who will head the new entity in Asia Pacific.

For Compaq vice president and managing director Paul Chan, it would be a coming home of sorts. Prior to joining Compaq in 1995, Chan spent 17 years with HP where he held a number of senior management positions.

HP's Lien is equally impressive. She began her career with HP as a systems engineer in 1978.

Dataquest's Bertram said that one shouldn't assume that HP would be managing the Asia Pacific business. "(To determine the head) they're going to go through a decision making process very soon to track their (Chan and Lien) records, growth strategies and financials. Then comes the interview process," he said.

For the first half of 2001 in Asia Pacific, HP recorded revenues of US$3.6bn compared with Compaq's US$5.4bn. Globally, in the last four quarters, HP reported sales of US$47bn against Compaq's US$40.4bn.

Asia Pacific officials from Compaq and HP declined to comment or provide any updates on the merger.

The combined companies will be organized around four operating units. An imaging and printing group led by Vyomesh Joshi, now president of imaging and printing systems for HP; an access division business led by Duane Zitzner, now president of computing systems for HP; an information-technology infrastructure business led by Peter Blackmore, currently executive vice president of sales and services for Compaq; and a services business headed by Ann Livermore, now president of HP services.

The chief financial officer of the combined companies will be Robert Wayman, currently the chief financial officer of HP.

The acquisition will dwarf the last big merger between PC companies. In 1998, Compaq bought Digital Equipment, but for approximately $9.6bn dollars. Through the acquisition, Compaq hoped to graduate from being a manufacturer of PCs and low cost servers to a full service computer provider with high-end hardware, an international services and consulting group, and chip technology.

HP's buyout of Compaq will be fraught with difficulty, according to Ashok Kumar, an analyst at US Bancorp. The two companies are very much alike. Roughly one-third of HP's revenue comes from PCs, notebooks and servers. About half of Compaq's earnings come from the same sources. Their Unix server businesses are similar.

"There are so many overlapping units there is no complementary benefit," he said. "The problem with HP is that they have a lot to deal with and if they want to get Compaq, it is going to be really tough."

HP may be buying Compaq for its services business, Kumar speculated. Compaq currently gets 23 percent of its revenue from services, Kumar pointed out, but the revenue largely comes from basic support and maintenance. The margins for the services business come to only 14 percent.

Another issue that will likely come up is how to integrate the PC divisions. HP outsources 100 percent of its manufacturing. Compaq has been trying to move to a build-to-order manufacturing model for several years.

In January, Bear Stearns analyst Andrew Neff raised eyebrows when he issued a blunt report calling for massive consolidation. Among his recommendations was that HP should buy Compaq.

Staff writers Michael Kanellos and Ian Fried contributed to this report.

See the Business News Section for full coverage.

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