HP Hopes Lessons of Failed Mergers Make It a Success
Hewlett-Packard Co. managers have earned a vacation after Tuesday’s court ruling that ensures victory in the bitter shareholder battle to acquire Compaq Computer Corp. Instead, they will be working harder than ever to disprove legions of doubters who say the company faces an uphill battle to make good on ambitious promises.
HP faces slack technology spending and the herculean task of combining gigantic firms with divergent cultures. Past mergers suggest a daunting future.
“No company in history ... has been able to buy itself out of mediocrity,” said Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray. “The integration challenges this company faces [are] insurmountable.”
Failed tech mergers hover like ghosts over HP Chief Executive Carly Fiorina’s assurances of higher profit and cost savings from streamlined operations and new market initiatives. Compaq became ripe for the picking, experts said, after it botched acquisitions of computer makers Tandem Computers Inc. in 1997 and Digital Equipment Corp. in 1998.
HP officers said they have studied the past--and moved aggressively to integrate the two giants before the deal becomes final Tuesday--in order to avoid such pitfalls. More than 1,200 HP and Compaq employees have logged hundreds of thousands of hours creating the new organization, and HP has adopted a strategy to cut overlapping product lines.
For example, Compaq’s strong presence in the market for industry-standard server computers that manage networks will almost certainly obviate a similar HP division. Likewise, Compaq’s popular iPaq hand-held computer probably will win out over HP’s less successful offering.
But success will depend on melding the two companies quickly, analysts said.
“They can make dramatic changes ... without any resistance” as long as it’s done within six months, when merger-related losses can be written off on quarterly reports, said Martin Reynolds, an analyst with Gartner Inc. Flat demand in technology spending may give HP the breathing room to make the transition without having to fully test its new organization for at least six months.
After HP completes its anticipated 12,000 to 15,000 layoffs, it will face the problem of keeping key Compaq engineers and managers in the fold. Many previous high-tech combinations failed when employees cashed in newly liquid stock options, then bolted from large, stodgy companies in favor of smaller start-ups, said Henry Chesbrough, a business professor at Harvard University.
Cisco Systems Inc., the network equipment giant, broke that mold by acquiring dozens of firms while usually retaining key talent. It did so, in part, because Cisco stock was soaring in a booming tech economy.
“Cisco also found meaningful roles for the managers of the acquired companies,” Chesbrough said. HP officers “are aware of this and thinking hard about it. They have Compaq people in meaningful roles.”
HP may lose more of its own long-term employees--many of whom opposed the merger. But the tech slump ironically may work to HP’s advantage in that regard.
“Where are these people going to go?” given the dearth of tech jobs, Chesbrough said.
A bigger challenge may be turning around HP’s stumbling PC division.
The merged company will become the largest PC maker--Compaq and HP sold 21% of PCs worldwide in 2001, compared with Dell Computer Corp.’s 16%--but trend lines are discouraging. HP and Compaq’s combined PC sales fell 19% last year, compared with a 14% drop for the industry and a 3% rise for Dell, according to International Data Corp.
Dell CEO Michael Dell already has vowed to take market share away from Palo Alto-based HP amid customer confusion during the transition period.
Many analysts question whether Fiorina--who pushed through the merger with fearless determination--is well suited to the complexity of running the new HP, especially after a merger battle that cast aspersions on her integrity. Her years as an executive at AT&T; Corp. and Lucent Technologies Inc. focused on sales and marketing, not operations.
“The [HP] board has obviously endorsed Carly and will have to give her at least a year, but I suspect more like 18 months to demonstrate that the merger was the right direction,” said David Yoffie, a Harvard Business professor. After that, “any reasonable board would need to reassess the performance of the CEO.”
HP shares Wednesday fell 24 cents to $16.86 on the New York Stock Exchange.
