Compaq Combo

It’s been a rocky year for Michael Capellas, the affable 47-year-old chief executive of Compaq Computer Corp.

A week after Compaq announced plans to merge with Hewlett-Packard Co. in order to better weather the biggest downturn in the computer industry, terrorists struck Sept. 11.

Business spending on technology, already reduced, virtually ground to a halt. A brutal price war with Dell Computer Corp. left Compaq battered. The Houston computer company emerged from 2001 with a 21% drop in sales and a record $785-million loss.

Capellas, blind in one eye since childhood, is used to adversity. When told he was too scrawny to be a linebacker for his high school football team in Warren, Ohio, Capellas trained until he became not only the team’s linebacker but also its co-captain.

Now Capellas heads a company considered the junior partner in a hotly contested $22-billion merger whose fate will be decided this week by shareholder vote.

Question: Make the case for why HP and Compaq should merge.

Answer: The market has shifted. Customers are now looking for partners who can survive. They want fewer strategic partners, and they want partners who can serve them from end to end.

The second part of that equation is that we know that the industry is moving to build things using more standard building blocks. Standard microprocessors, standard operating systems.

The enterprise market is made of six building blocks. We’re very strong in three. They’re very strong in three. It happened to not be the same three. So you have an almost perfect complementary fit.

Compaq is very strong in fault-tolerant supercomputing. HP is very good in the data center. Compaq is extremely strong in industry-standard servers. Compaq has the No. 1 market share position in storage. HP has got a full offering in management software. Compaq has not traditionally played there.

So if you look at being able to create a complete enterprise play that can run against IBM, there is no other combination in the marketplace.

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Q: What’s the future of the PC industry?

A: I personally am absolutely bullish on the personal computer space, and I think the market is being incredibly shortsighted.

We are, in fact, at the end of a three-year period of hyper-growth in the business. As we go through the readjustment of the whole Internet space, we are at a low period. But that does not talk about future demand.

So, point No. 1 is that people will continue to find new and innovative uses for the Internet. That will happen and it will be illogical to think otherwise, particularly as we stream more content up there. Two, the Internet will reach more and more countries. So there will be a global expansion in Internet access.

We used to think about putting complex devices in businesses and simple devices at home. Then the pattern turned. Commercial users are now looking for simpler devices and ease of manageability. For the consumer, there is the integration of the Internet with the next generation of content, with music being the killer content. We will stream video into all kinds of devices, from cellular phones to automobiles.

So, simple devices at work. Very rich, media-intensive devices in the home. The PC becoming the center of education, becoming the center of home entertainment. It’s all about the next generation of Internet access.

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Q: What kind of growth do you see in the PC business this year?

A: Even in a down market like this year, you’ll probably see a 10% growth in units. And you’ll get strong double-digit growth over the next five years.

The interesting question is: What are we going to call a PC? When you have a jukebox at home that stores all your music and connects to the Internet, is that a PC? When you have a navigation system in your car that has content streaming into it, is that a personal computer? When your telephone has multiple functions, is that personal computing?

If you view the business as a simple PC beige box business, then it’s a pretty stable business. If you view it as all the next-generation devices being the reception points of new forms of data with new forms of audio streaming and video streaming, then it’s actually a business that will have at least one more wave and probably more.

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Q: What will happen if the merger is called off?

A: We have not backed off an inch in doing the structural programs that we set out to do to improve our basic business model. We’ve done a really good job in redefining our distribution business, reducing inventories, building product road maps for industry-standard servers and storage. These are the two fastest-growing segments of the information technology industry.

We’ve taken tremendous pains to take our cost structure down. We took out over 9,500 jobs last year, which means we went into this year with a much more competitive cost structure. We believe the future of the PC business is a pretty exciting business, but it’s got to go through a transformation, and we can absolutely be one of the lead players in it.

But we also know we have some more work to do. So our task is to build on those pillars of fault-tolerant computing, industry-standard computing, next-generation Internet access. We are either No. 1 or No. 2 in every market we participate in.

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Q: Several institutional investors have said they will vote against the merger because they believe it will distract the two companies from their core businesses. Can you rebut?

A: We all know that whenever you go through mergers you have to act quickly and there is a period of distraction. We also know that this whole industry is going to go through an unbelievable transformation, and even individual companies that aren’t going through mergers are going to have to remake themselves.

And so there’s no question that there will be a period of time where we will have to work hard at some merger activities. These include things like completely rethinking our product road map, which everybody needs to be doing regardless of whether they are doing a merger. They are things like reducing our cost base, which everybody needs to be doing. And they are things like reacting to customers who have very different buying patterns, which everybody needs to be doing.

Am I going to oversimplify the fact that mergers are not tough? Absolutely not. They are tough. But whenever you do anything to really change the game, you go through a few changes.

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Q: How do you deal with the perception that Compaq is being swallowed by a larger company and will lose out in the integration process?

A: We went into this from Day 1 with it being a 60-40 merger. But when you get down to it, people will be judged by their merits. This is a very strong-willed group of people. Both companies are going to end up having market leadership in virtually every important function of the IT business.

At the end of the day, you’re talking in excess of an $85-billion company. We are going to create more opportunities. So you’re looking at the opportunity. There are no shortages of opportunity for good people. It’s an opportunity for really good people to shine. Obviously, there will be hard decisions to be made, but I think the company will be well represented. I worry about a lot of things, but that’s not one of them.

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Q: What does keep you up at night?

A: The general economy. It’s tough to go into a merger when there is still a huge uncertainty about where in fact the economy is going.

I worry about the customer reaction. You can’t ignore the fact that there is a very difficult proxy fight.

Nobody entered into this anticipating it. Obviously, it came as a surprise and late in the game. I worry about the effects of a prolonged proxy fight on our customers and on our employees.

This is a very resilient organization, but there’s no question that this has been very difficult on people. I worry about what that means. A lot of energy has been spent on a proxy fight that we could have spent on market strategy, and I am somewhat concerned about that.