HP-Compaq Integration Aims to Find a New Way
For Hewlett-Packard Co., the real work is just beginning.
After claiming victory Tuesday in a hard-fought proxy battle, HP apparently has the go-ahead to acquire Compaq Computer Corp., though official results won’t be in for weeks.
What sold many of the large institutional shareholders, which sided with HP Chief Executive Carly Fiorina against dissident director Walter Hewlett, was the unprecedented effort HP and Compaq put into planning exactly how the two firms would mesh.
But the integration plotting that has occurred--more than 500,000 hours of work laying out everything from who will staff the top several layers of management in every division to what will happen every 15 minutes on day one of the deal’s legal closing--pales before the enormous task ahead.
“All I’ve seen is a PowerPoint” presentation, said Bear Stearns analyst Andrew Neff. “I haven’t seen any execution.”
That execution will be critical if HP is to avoid the painful and prolonged decline Hewlett and many HP employees fear.
No merger of large technology companies has lived up to management expectations.
And because the financial logic of this deal is based on eliminating $2.5 billion annually in overlapping jobs and product lines, even Fiorina expects to lose about 5% of the merged firm’s revenue as customers walk away. Industry analysts said the real sales loss could be triple that figure.
Many big companies have policies against obtaining all their computers or other goods from one supplier, and some buyers already are switching because of uncertainly about which product lines will stop being supported.
“Short term, there will be an incredible amount of turmoil. Most of the people will be in job-preservation mode, they won’t be focused on serving the customer,” said analyst Ashok Kumar of US Bancorp Piper Jaffray. “It leaves the flank open for competitors to come in.
“No company has ever bought itself out of mediocrity. These guys are trying to swim against the currents of history, and it’s truly unfortunate. The people who will pay for it are the shareholders and the employees.”
As soon as the merger closes, Fiorina said Tuesday, the HP team will “hit the ground running.” Customers will be the first priority as employees tell them who their contacts will be and which products will survive.
The second priority will be the employees, many of whom are worried that they will be among the 15,000 to be laid off, about 10% of the work force, beginning as soon as six weeks after the close.
Many of the plans already are spelled out in the integration team’s documents, which are secret because of U.S. and European antitrust rules. Their preparation has nonetheless been exhaustive. The color of the new corporate badges has been picked. The new Web site, which integrates automated help for both firms’ customers, is ready to go.
One member of the team, Christine Politis, likens the process to “planning a giant wedding. It’s mind-boggling, the complexity.”
For Compaq, the issue is especially pointed. Its painful experiences merging with supercomputer maker Tandem in 1997 and Digital Equipment Corp. in 1998 were a major factor in Compaq becoming a takeover target, and the mishandling of those integrations led to CEO Michael Capellas’ ascension.
“People will have stamped on their foreheads what piece of that $2.5 billion in savings they will be responsible for. That’s the accountability that we missed in our merger with Digital,” said Michael J. Winkler, Compaq executive vice president and a senior member of the Clean Team.
“We’ve made all the product road map decisions for the next three years,” Winkler said. “We have determined every factory that will remain open and which will close. We have determined a go-to-market strategy for our sales, distribution channels, call centers.”
Central to the plan is which products survive. With customers uncertain, HP and Compaq will issue “security blankets” giving customers options to trade in discontinued products for current wares or extend warranties on old gear.
Managers have chosen among competing products and immediately will ax the losing lines, skirting the need to integrate two teams of workers. Capellas this week gave hints about which key products would survive from each firm.
“Compaq is strong in fault-tolerant supercomputing. HP is strong in Unix-based computing. Compaq leads in industry standard servers, a market in which HP has not traditionally participated. Compaq is a leading provider in mid-range storage, while HP has high-end storage. Compaq sells system management software, a market in which HP is not present,” Capellas said.
The integration team has spent time working out how to combine two distinct corporate cultures. “Culture is not a phrase. It is how people operate every day,” Fiorina said.
Some industry analysts are skeptical that any plan will obviate the pain of merger. “Management will throw out their plan on day one,” said analyst Roger Kay of IDC in Framingham, Mass. “But somehow things never work out that smoothly.”
HP shares fell 60 cents to $18.20 and Compaq lost 32 cents to $10.82, both on the New York Stock Exchange.
HP is offering 0.6325 share for each Compaq share, valuing Compaq stock at $11.51 based on HP’s Wednesday close.
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