THE COMPAQ-HP MERGER: IT'S ABOUT SURVIVAL
By Carl D. Howe, Principal Analyst, Forrester Research

05_09_2001

Despite Wall Street talk of synergies and cost savings, the Compaq-HP
merger is about something bigger: survival in a consolidating industry. By
acting now, these firms guarantee that they'll still be here to compete in
the post-PC world of services

Hewlett-Packard yesterday announced a $24 billion merger with Compaq
Computer, sending shock waves through the PC industry. Assuming regulatory
approval, the company created by this merger will:

* Boast $87 billion in annual revenue. The newly merged Hewlett-Packard
will be second only to IBM -- with $90 billion -- in revenue from IT
products and services.

* Be the global leader in servers, imaging, and access devices. Product
dominance in categories like Intel-based servers, digital cameras and
printers, and pocket PCs will give the combined firm immense market power.
The new company will also control nearly two-thirds of retail PC sales.

* Cut $2 billion in costs. By eliminating redundant functions between the
two firms and cutting the number of contract manufacturing suppliers, the
resulting firm expects to sport a leaner cost structure by 2003, with
efficiencies increasing to $2.5 billion in 2004.

HP Needed This Deal For Survival In The Post-PC Era

By any measure, the PC market is in shambles, with PC sales falling 10%
this year and firms like Gateway axing unprofitable geographies and
products. But with this merger, Carly Fiorina and Michael Capellas are
looking beyond the current thunderstorm. After a nightmarish two years of
integration, the new HP will emerge stronger with:

* One of the few remaining computer businesses. Michael Dell launched a
price war this year in hopes of driving his competitors out of business
during the downturn. But the new HP will have the deep pockets required to
sustain short-term losses and product diversification that Dell Computer
doesn't have. The result? The new HP lives to fight on in the era of
services and non-PC platforms instead of being stuck fighting for the
title of lowest-cost PC maker.

* A locked-in $15 billion services business. Technology investments have a
surprisingly long lifetime -- both HP's and Compaq's customers struggle to
maintain a wealth of complex legacy technology ranging from old HP 3000
servers to Compaq's OpenVMS operating system. With a combined 65,000
services professionals, the new HP will be in a unique position to retain,
satisfy, and upsell these customers -- something it couldn't do without
the merger.

* A portfolio of important technologies. With the Compaq deal, HP picks up
two high-growth product lines -- the iPAQ pocket PC, and Compaq's
no-nonsense storage business -- and a gold-plated, nonstop platform
business. In five years, these technologies will be more profitable than
servers and desktop PCs.

Users Should Do Their Own Thunderstorm Planning

The next two years aren't going to be pretty while HP tries to digest the
Compaq acquisition, as anyone who remembers the Compaq-Digital merger can
attest. So what can users do to keep the pain of this acquisition from
affecting them?

* Stay the course for the next nine months. Both Compaq and
Hewlett-Packard must continue with business as usual until this merger's
expected close in mid-2002. Users shouldn't expect any technology road
maps to change during that period, nor should they alter their buying
plans. Instead, now's a good time to lock in favorable services deals.

* Look at the new HP a year from now for infrastructure outsourcing deals.
Compaq's services staff will add multivendor experience to HP's more
proprietary services business. By the time the dust settles on this
merger, the new HP will have the staff and skills to handle desktop and
multivendor networking jobs that IBM Global Services and EDS won't touch.