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NEW ANALYSIS: HP/Compaq - Challenge, Opportunity

NEW ANALYSIS: HP/Compaq - Challenge, Opportunity

Two IT giants collided last week, and the smoke is still clearing. For the most part, the channel's response has been one of tentative support. With the official HP announcement came a sobering warning that the new conglomerate would be targeting the increasingly lucrative services sector.

The local relationships of Compaq and HP have been thrown into question as services partners and distributors are left reeling from the deal.

Nick Cuthbertson, managing director of Protech, a local services provider and Compaq partner, is wary of the uncertainty the announcement will create in the services sector.

"It is a mammoth deal and it will take a lot of digesting," Cuthbertson said. "That will create uncertainty and chaos for a period of time; just think back to the Compaq/Digital merger."

Cuthbertson is calling on the new HP/Compaq conglomerate to clarify its business directions as soon as possible for the benefit of partners and customers alike.

"On the hardware front I will be expecting some road maps fairly soon - that is the only way to allay consumer concerns about product lines," Cuthbertson said. "I don't know if there is any way to clear up the uncertainty on the partner front, and in the meantime the only approach we can take is that it's business as usual until we know more."

HP partners are more upbeat, with Michael Bosnar, managing director of the newly formed HP distribution partner eXeed, pointing out the positives of aligning with the pre-eminent brand.

"This has come at just the right time for me," Bosnar said. "HP has always had a strong commitment to its channel partners and been consistent in the way it managed those relationships. The same has not always been the case with Compaq."

Bosnar said the combined strengths of the two organisations will create a great opportunity for the HP channel.

Others in the channel are playing the waiting game, with some expecting a 12-month delay before the effects are felt in the Australian channel.

Fiona Dicker, managing director of Compaq's leading Australian distributor Dicker Data, said she had suspected a major merger for some time, commenting that the market has shrunk too much to support many major players. "Compaq is currently conducting a review of its distribution channel, and it will be interesting to see what comes out of it now this has blown up," she said.

Steve Rust, managing director of Ingram Micro, a distributor which has relationships with both vendors, said Australian distributors had been caught by surprise. "I'm glad I'm not the one doing the integration on this deal because it would be a huge job," he said.

"There are certain complementary elements to the product lines; HP is strong in printers, while Compaq holds sway in the handheld and PC market," Rust said. "At the end of the day, however, HP is an exceptionally strong brand name and will now be even stronger."

Looking at the numbers, it appears a combined HP/Compaq services business could come close to matching it with IBM and other consulting heavyweights. The combined HP/Compaq services business will boast around 65,000 services professionals compared to IBM's 100,000-plus.

In recent times, the new bedfellows have been aggressively trying to remake themselves in order to offer enterprise services, software, and support beyond mere computing hardware. In September 2000, Hewlett-Packard was openly toying with the idea of picking up IT consulting giant PricewaterhouseCoopers for $US18 billion, but the plan was dumped after a sharp dip in earnings forced CEO Carly Fiorina to back down.

Compaq was also prepared to throw some significant dollars at developing its services capabilities. In April 2001, it offered $US266 million for Web consulting firm Proxicom, hoping to pick up a bevy of attractive clients such as AOL Time Warner, General Electric and General Motors.

As it turned out, Dimension Data pipped Compaq at the post, paying $400 million for Proxicom.

While cautiously watching the HP/Compaq deal develop, Darron Lonstein, director of enterprise systems at Dimension Data in Australia, is showing industry bravado when it comes to taking on what promises to be a services powerhouse.

"The industry will continue to be tough, but this announcement may just be the shot in the arm it was looking for," Lonstein said, pointing out that the merger would lead to one less player on the cluttered IT vendor field.

"We have been competing with Compaq at the services level for some time now. As separate entities, Compaq and HP were already focusing on service-based offerings so a deal like this one will only end up reducing competition for us."

Others in the services sector have similar views, with Powerlan CEO Theo Baker predicting generic services companies will suffer a serious blow as the new HP launches onto local markets.

"There will be increasing pressure on those resellers that are just providing generic services associated with IT," he said. "These big players are able to do commodity integration at a much better price."

Baker is advising channel services companies to focus on developing their own intellectual property and to become involved in niche markets.

"They (HP/Compaq) are going to be providing the commodity infrastructure services," he said. "The challenge to local players is to develop their own generic integration services."

The other market bracing itself for the repercussions of the deal are local white-box manufacturers. Rather than becoming overwhelmed by the merger, however, most are looking forward to the opportunities it will provide.

Maree Lowe, managing director of white-box manufacturer and distributor ASI Computers, believes Australian companies should be focusing on the chance to pick up extra business while the details of the deal are being hammered out.

"They are talking about merging two huge companies, and it will not necessarily be a smooth transition. We are going to end up with a bigger giant and that could be dangerous for the market, but what is more important at this stage is that HP will have a period of indigestion," Lowe said.

"While they are sorting out those problems there will be some opportunities for Australian assemblers and outsourcers."


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