HP-Compaq Merger Gets No Raves
If Hewlett-Packard Co.’s $21-billion proposed acquisition of rival Compaq Computer Corp. were a Broadway show, it would already be closing. Even as company executives Tuesday were extolling the deal, investors were fleeing and analysts were giving it horrible reviews.
“This is like leaning two drunks against each other to get them to stand up straight,” said Lou Mazzucchelli, a partner with Ridgewood Capital Management. “The odds of it working out approaches the infinitesimal.”
“There’s sort of an old rule of life that the best mergers are done by two companies that are each No. 1 in their businesses,” said Michael Murphy, editor of the California Technology Stock Letter. But if it’s two weaker companies, such as the HP-Compaq pairing, “it’s usually just a prelude to disaster.”
HP Chief Executive Carly Fiorina and her Compaq counterpart, Michael Capellas, tried to sell the deal Tuesday to analysts and the media. As if anticipating the negative reaction, they stressed that the merger wasn’t going to be easy.
“It all looks great on paper,” Fiorina said. “Maybe you [agree] at this point that the strategic logic is compelling. We certainly do. . . . But none of it will matter if we cannot integrate this effectively.”
Capellas had a message for his employees and customers: “Hang tight for the ride.”
On Tuesday, the trip was all downhill. HP’s shares dived $4.34 to close at $18.87 on the New York Stock Exchange. The 19% drop returned its shares to levels last seen in 1996. Compaq’s stock dropped $1.27, or 10%, to $11.08, also on the NYSE.
If everything goes according to the companies’ plans--and the stocks don’t fall so far that the merger is abandoned--the deal will close in about 10 months. Both U.S. and European regulators will have to approve the deal.
Fiorina said that much work had gone into the merger. “We have thought carefully about product line rationalization. We have thought carefully about organizational rationalization.”
By “rationalization,” she meant cuts in employees and in product lines. The two companies currently have 145,000 employees, a total that would drop immediately by about 15,000 after the merger. As for the integration of product lines between Palo Alto-based HP and Houston-based Compaq, it’s not clear yet how that will happen. It’s one of the things that is worrying analysts.
The new company would consist of four units: personal and hand-held computers, with annual revenue of about $29 billion; information technology infrastructure, including server computers and data storage, with revenue of about $23 billion; printers, with revenue of $20 billion; and consulting with revenue of $15 billion.
“These are two very redundant companies,” said Roger Kay of International Data Corp. “They’re going to be lopping a lot of product lines. I can imagine the Compaq hand-held will win out, because it has a better market position. And HP consumer desktop computers have been doing better than Compaq’s.”
But Kay said he didn’t see the point of the merger. “Where’s the leverage here? What can they get that they don’t already have?” His conclusion: “Carly is looking to distract people from the fact that HP isn’t doing very well.”
Mazzucchelli, the Ridgewood partner, didn’t see how the HP-Compaq brand situation would sort itself out. “Compaq is a pretty good brand, but what is HP going to do with it? Deep-six it? They can’t do multi-branded things like ‘Compaq by HP.’ It wouldn’t work.”
His analysis: “Some people think this might be a desperation play on the part of one or both sides.” Compaq, he said, made a valiant effort to pump themselves up to compete with IBM. In 1998, Compaq acquired computer company DEC for about $9.6 billion. But early this year, Compaq abandoned Digital’s Alpha chip in favor of technology from Intel. HP, meanwhile, is phasing out its own microprocessors.
Their ambitions now are gone, along with anything that made them special.
“You have two companies [HP and Compaq] struggling in commodity markets like PCs. They haven’t been able to get their service businesses to catch fire, and they haven’t been able to achieve a dominant position in enterprise servers,” Mazzucchelli said.
One analyst, Carl Howe of Forrester Research, was a bit more optimistic. He compared the deal with the roll-up late in the Depression of disparate auto manufacturers under one umbrella. The result: General Motors.
“At the moment, they were doing it merely to survive, but at the end of the day they cleaned Henry Ford’s clock,” Howe said.
HP, he added, “will come through this stronger than if HP and Compaq had tried to muddle on. I’m not sure we’ll look back and say this was one of the best mergers ever. But I’d be hard pressed to name a great merger in the computer industry. Sometimes merely surviving is a success.”
In the personal computer market, Compaq and HP combined have about two-thirds of the market in retail stores. But that figure doesn’t account for Dell Computer Corp.’s sizable stake in direct sales.
“I think this is a merger in which the antitrust regulators will apply the broader market scan,’ said George Mason University antitrust expert Ernest Gellhorn.
As for the market in powerful server computers, its chief competitors, IBM and Sun Microsystems, “are hardly shrinking violets who are going to be threatened by this new entity,” Gellhorn said. “On balance, it would appear a good bet for antitrust enforcement approval.” A Justice Department spokeswoman said it was too early to tell whether it or the Federal Trade Commission would be looking at the deal.
European regulators, as always, are more of a wild card. Earlier this summer, they vetoed General Electric Co.’s planned takeover of Honeywell International Inc. Fiorina said Tuesday that she would soon meet with Mario Monti, the key European regulator, and was “comfortable” an agreement could be reached.
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Times staff writer Charles Piller contributed to this report.
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