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Chicago Tribune | HP-Compaq merger stirs investor doubts

chicagotribune.com
September 8, 2001

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HP-Compaq merger stirs investor doubts By Rob Kaiser Tribune staff reporter Published September 5, 2001 Investors took one look at the proposed marriage of Hewlett-Packard Co. and Compaq Computer Corp. on Tuesday and ran for the exits. The bold merger--the biggest in computer industry history--carries big risks because neither company has a good track record in completing deals. Furthermore, analysts said deals born out of brutal price competition--which many conclude this deal reflects--end up as failures. "In some sense they were thrown into each others' arms by the market circumstances," said Roger Kay, a computer analyst with research group IDC. "They probably would not have done this if the economy wasn't down. They felt they had to do something." Shares of Hewlett-Packard plunged nearly 19 percent, or $4.21, to $18.87, while Compaq's stock dropped 10 percent, or $1.27, to $11.08. As analysts fretted about the merger minefield the two companies must cross, the deal's value plummeted. What started out Tuesday as a $25 billion arrangement, based on Friday's closing prices, ended the trading session as a $20 billion deal. The frigid response reflected investors' concerns about whether the companies can overcome prickly integration issues and potential antitrust concerns. Bear Stearns analyst Andrew Neff said the way HP and Compaq have structured their businesses could make integration difficult.

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Hewlett-Packard is organized in a matrix structure-divided into product groups that draw on central resources like sales and marketing. In contrast, Compaq's divisional structure gives each product group its own self-contained sales and marketing force. Integrating matrix and divisional structures is "often very challenging," Neff said.

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have to assuage concerns about how the deal will affect retail consumers, analysts said. A combined HP-Compaq would have 18.7 percent of the market for personal computers and 33.6 percent of the market for PC workstations, according to Gartner Dataquest. While the market shares are competitive, the companies are Nos. 1 and 2 in retail PC sales. Archrival Dell Computer Corp. holds 15.5 percent of the overall PC market, but doesn't sell through retailers. "I see retail specifically as a problem," Reynolds said. "When this merger happens, you essentially kill one of the two fiercest competitors in the retail space." The "new HP," as a company press release put it, is aiming for the high-tech Holy Grail of selling companies suites of hardware, software and services to satisfy nearly all of their technology needs. Yet while many companies have tried to put together such combinations, only IBM and a few others have succeeded. Analysts remain skeptical that Hewlett-Packard can break from the pack. "We would have concerns about the ability of the companies to smoothly integrate the two operations in view of each company's recent challenges and shortfalls," Neff said. The combined company will boast market-leading positions in PCs, printers and servers, but management will be hard pressed to get the companies' cultures to mesh and advance individual initiatives in the diversified firm. Both companies have historically had trouble integrating merged firms. Compaq purchased pioneering computer company Digital Equipment Corp. in 1998 for about $9.6 billion. But, after waffling for three years, it finally abandoned Digital's Alpha chip earlier this year in favor of technology from Hewlett-Packard and Intel Corp.
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HP's track record is equally spotty, industry experts said. The company has no experience in major dealmaking, and has long been criticized for a paternalistic management style that has prevented it from making tough decisions about job cuts and strategic direction. The combined company, which will have annual revenue of $87 million, expects cost savings of $2.5 billion in a few years. It will have about 135,000 employees after cutting about 15,000 positions. Also, Hewlett-Packard didn't comment on its proposed bid of $610 million for bankrupt Comdisco's continuity services unit, which ensures that companies can keep their computers running in event of disaster. The bid is still subject to approval from the bankruptcy court. But analysts said they expect Hewlett-Packard to continue its pursuit of the Rosemont technology firm unit because it fits with HP's strategy to bolster

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Rosemont technology firm unit because it fits with HP's strategy to bolster service offerings. Hewlett-Packard said the merged company will be divided into four units-"access devices" (such as PCs and hand-held computers), imaging and printing, information technology infrastructure and services. If the company gets distracted by the merger process, analysts said competitors will pounce. "Dell right now is feeling pretty good about this," said Gautam Desai, vice president of licensing services at Chicago-based Doculabs Inc. He said Hewlett-Packard's influence will likely curtail any serious push by Compaq into the consumer market, opening the door for Dell and Gateway to gain market share. Given the PC price war, the company is likely to steer its efforts away from that industry in favor of the higher-margin market for services. Said Mike Ruettgers, chairman of data-storage giant EMC Corp.: "There is going to be a lot of confusion between those two companies for probably the next two years. Any time you put two huge companies together you are going to get difficulties." Observers said the deal shouldn't affect customers. Most analysts expect the low prices on PCs will remain as the capacity to produce the machines is higher than demand. "The PC industry is under the gun," Kay said. "It's very hard to come by revenue growth and profits." Tribune news services contributed to this report. Copyright 2001, Chicago Tribune

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