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HP-Compaq: What Happens Now?

On the heels of a bitter six-month proxy battle and close shareholder vote, Hewlett-Packard Co. managed to declare victory on Tuesday afternoon in its $21-billion bid to buy Compaq Computer Corp. Based on a preliminary tally, HP announced that it believes it has received sufficient votes to approve HP's merger with Compaq. The deal appeared to be sealed with a follow-up vote on Wednesday in which Compaq's shareholders also approved the merger. Official certification of the voting results is expected to take a few weeks.

The merger has been bitterly opposed by Walter Hewlett, son of the company’s late co-founder, who expressed reservations about acquiring the potential burden of Compaq’s low-end, low-margin PC business. A number of large institutional investors lined up on Hewlett’s side against the merger. Hewlett stated that until the final tally is completed, the vote is still “too close to call.”

As a result of the merger, HP is expected to beef up its services offerings, as well as its Windows-based server and workstation lines. There will be an added thrust in developing and marketing Itanium-based processors, according to Dick Lampman, HP's senior VP of research, who will be running the combined R&D operations of the merged companies. “Both companies have made long-term commitments to the IA-64 Itanium architecture,” says Lampman. “This is an area that we're both making substantial investments in, and where the combined company will have a dramatically stronger program.” The IA-64 microprocessor was originally designed in HP’s labs before Intel Corp. took over development and production in the late 1990s.

However, some customers appear to be nonplussed by the effects of the merger. “I don't see how Compaq is going help HP,” remarks a systems and software engineer with a high-tech manufacturer based in the southwestern United States. The engineer, whose company is a Windows 2000 shop running HP servers and workstations, observes that “HP already has a good reputation in it technology and peripherals. I just don't see what Compaq is adding to the company.”

This uncertainty about the merger is echoed in a recent survey of HP and Compaq customers by Technology Business Research Inc.. The survey confirms that more customers favor the merger than oppose it (30 percent in favor versus 24 percent against). However, almost half the group of customers, 46 percent, remained undecided. For the most part, both Compaq and HP customers do not see any major impacts on their IT departments – 60 percent in the survey indicated they would experience a zero or a positive impact.

The greatest benefits in combining the organizations will likely be in the areas of availability and clustering, says HP’s Lampman. “HP has historically focused on availability, and Compaq has historically focused on non-stop systems, and scaling for performance,” he explains. Lampman characterizes HP and Compaq’s Windows-based offerings as a “very complementary technology base.” Both companies have also invested heavily in blade architectures and storage systems, he says. Plus, customers should expect to see more Linux initiatives from the HP-Compaq combo as well, he adds. “Both companies have been working aggressively in expanding Linux as an offering. HP has developed the Linux kernel for the IA-64, and is continuing to expand its work in high-availability extensions for Linux.”

A product roadmap, under development in recent months, will be issued shortly after the merger is declared official. Rather than attempt to mesh technologies together, HP and Compaq are undertaking an “adopt-and-go” approach, in which engineering teams from both companies are selecting the best technologies for each product line offering, explains Shane Robison, CTO of Compaq. “Rather than try to blend the two technologies, we've chosen the one that is technically superior and the one that we feel has the more advanced market share position. Where appropriate, we will cherry-pick individual technology features.”

One area that will position HP-Compaq strongly within enterprise environments is HP’s Unix line, juxtaposed with Compaq’s Windows systems, says Robison. “Big enterprises today run both environments, and we'll be in a position to support both.” Compaq will also add its Tandem fault-tolerant high-end computing environment, which runs the world's major stock exchanges, and many banking applications.

While HP acknowledges that the results of the voting are not official, palpable sighs of relief could be heard from the offices of HP Chairman and CEO Carly Fiorina. “We are gratified that HP shareowners recognize the compelling strategic and economic benefits of the merger,” Fiorina said Tuesday. “The intense debate throughout this contest has raised important issues and prepared us even more fully for the integration and marketplace challenges that lie ahead.”

However, these challenges may be formidable, and the risks run high for such an effort to integrate two huge companies, experts warn. “While there are pieces that fit together, you have to ask if that is enough to justify the extraordinarily high price HP is paying for Compaq,” says Robert Mittelstaedt, a vice dean at the University of Pennsylvania’s Wharton School of Business. “The reason it's extraordinary is so much of the combined companies are in businesses that are not high-margin. [Fiorina] sees value in buying Compaq's consulting and services piece, which she believes will be a good fit for the future. The question is whether that price will be justified down the road.”

About the Author

Joe McKendrick is an independent consultant and author specializing in surveys, technology research and white papers. He's a contributing writer for ENTmag.com.

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