ANALYSIS Experts say the writing was on the wall, but a gasp of surprise could still be heard industrywide Tuesday after officials for both Hewlett-Packard and Compaq Computer announced they would pursue a merger.
The plan calls for HP to acquire Compaq in an all-stock purchase valued at $25 billion, according to officials for both companies. The target competition is enterprise IT service leader IBM, the worldwide leader in IT service revenue according to International Data Corp. in Framingham, Mass.
In the last few years, HP and Compaq each have been companies in the midst of internal transformations. They have been nearly in lock-step on decisions concerning the importance of promoting IT services over standalone products, as well as the decision by each manufacturer to abandon high-end PA-RISC computing platforms to develop along Intel's Itanium processor family.
Those similarities aside, industry experts see a long, tough road ahead for HP and Compaq as they move toward becoming one.
"We think the operation will be successful as long as the patient doesn't die on the operating table. There is a lot of risk associated in making this move, mostly around execution, integration and services," said John Gantz, senior IDC analyst.
Like many industry experts, Gantz points to overlapping service and product offerings from HP and Compaq as a potential nemesis to a smooth consolidation of the two company's resources.
"You can go down the list, product line by product line, and find synergies and cost savings, but the issue will be how they can pull the whole thing together into an integrated whole that ends up being competitive with IBM," Gantz said.
Todd Kort, a principal analyst at Gartner Group, an industry think tank based in Stamford, Conn., agrees that identical product catalogs from HP and Compaq make a merger difficult to understand. Because of this, Kort believes that although a merger between HP and Compaq is likely to be approved by regulating bodies, the two companies may very well find reason to throw in the towel before a merger is complete.
"I'm pretty negative about this," said Kort. "I think there is so much overlap that I find it hard to understand how [a merger] makes sense. And just like the PricewaterhouseCoopers [acquisition attempt by HP] that eventually fell apart, there are so many questions about [the HP and Compaq] deal that I think [HP and Compaq executives] might revisit the issue and say this really doesn't buy anything against IBM or Dell."
Opposing corporate cultures will add an additional degree of difficulty as HP and Compaq proceed toward a merger.
"It took IBM six or seven years to pull its act together, and now HP and Compaq have a similar chore ahead of them. You have two distinct companies with two distinct cultures at work. Last I looked the way Compaq assimilated DEC, it didn't work out so great for along long time," said Dana Gardner, senior analyst at Aberdeen Group in Boston.
"HP outsources almost 100 percent of its manufacturing and Compaq does almost 100 percent of its own manufacturing. If HP pulls out all of its business partnerships and tries to bring it to Compaq, it will destroy a lot of hard-won business relationships," Gardner said.
Workforce reductions and the fact that HP and Compaq are former foes also complicate the cultural issues separating the two companies, said Ashok Kumar, an industry analyst at U.S. Bancorp Piper Jaffray, in Menlo Park, Calif.
"There are many potential pitfalls in executing this strategy. To realize the projected $2.5 billion in cost savings will require a large number of layoffs, including in the server area," said Kumar. "HP has already endured multiple rounds of layoffs under CEO Carly Fiorina, and many have not been handled well, resulting in poor morale. Compaq employees have been trained to view HP in a hostile fashion; soothing these feelings will not be simple. A major challenge will be retaining key personnel through the massive restructuring that
