User doubts rise over HP, Compaq

User doubts rise over HP, Compaq

The melodrama surrounding the proposed merger of Hewlett-Packard and Compaq Computer is leading some users to re-examine their relationships with the two vendors.

A tense proxy fight looms, as HP and Compaq last week vowed to proceed, despite opposition to the deal from the heirs of both the Hewlett and the Packard families, who control a total of 18 per cent of HP's stock. Users may not know until February whether the merger will be approved by shareholders of the two companies.

That may not be soon enough for Therm-O-Link. The supplier of cable and wire started looking for a new server platform after HP last month announced plans to phase out its HP e3000 system. But it's leaning against a switch to the HP 9000 Unix server, said Jim Johnson, systems manager at Thermo-O-Link.

"I'm having a hard time trying to figure out what HP's core business is, and they haven't communicated that clearly," Johnson said. "I can't bet the company on a 9000 server that they may discontinue in nine months." Instead, he added, hardware from IBM or Dell Computer is at the top of his evaluation list.

Seven other users also said the continued uncertainties surrounding the planned merger are a cause for concern. John Moon, CIO at Baxter International, said he wants the controversy to be resolved quickly because it's hard to determine which products will be supported by the combined company, or by either HP or Compaq should they go their separate ways.

"We've been stung in the past and [again now] with the economic downturn, so we spend a lot more time trying to understand how our key suppliers are positioned in the market," said Moon. Baxter, a US$7 billion medical services company, buys its laptops, desktops, servers and help desk services exclusively from Compaq.

Webb McKinney, president of business operations at HP, reiterated that the merger would strengthen the ability of the two vendors to serve large customers. "The remaining 82 per cent of shareowners have not made preliminary statements as to how they will vote," he added.

But Paul McGuckin, an analyst at Gartner, said the battle between HP's management and members of the Hewlett and Packard families will make swaying the institutional investors that hold 57 per cent of HP's stock much more difficult.

McGuckin also cautioned users about making investments in Compaq's Tru64 and OpenVMS operating systems and HP's midrange storage products, which might not survive if the merger goes through. "It's not a compelling story for users," he said.

Merger Hurdles

Winning shareholder and regulatory approval for the merger presents as many potential problems as scrapping the plan would.

For starters, antitrust concerns by the Federal Trade Commission may force HP and Compaq to sell overlapping high-end server lines. Some users are worried about investing in technology that might get divested.

"Users need to have a contingency plan, regardless of the outcome of the merger," said Rob Enderle, an analyst at Giga Information Group. "In the current environment, we're dealing with a risk-averse audience, and they don't want to put their jobs on the line for a company that may not be able to execute."

According to a Giga survey last week of IT executives who are currently purchasing technology products, about one-third said they wouldn't buy HP or Compaq products due to merger concerns.

"If the merger goes through, HP will grow by sheer size, but they're just gaining bulk," said Steve Willard, plant manager at Spectra American Color Lab. Willard said Spectra is contemplating a move from Compaq's AlphaServers to hardware from IBM or Silicon Graphics, due to concerns about the merger and Compaq's planned transition of the machines to Intel processors.

Does Compaq Have a Backup Plan?

The David and Lucile Packard Foundation announced its opposition to the proposed merger in a letter to HP's board of directors on December 7, an action that caught the attention of Compaq CEO Michael Capellas.

In a memo sent the same day to Compaq's 95,000 employees, Capellas said Compaq sought the merger to meet certain objectives, such as improving its PC business and expanding its services arm. But the note also stated that the company would "maintain a pragmatic view" of its future.

"But regardless of the circumstances whether we are part of the new HP or a stand-alone company I am confident in our ability to achieve these objectives," Capellas wrote in the memo.

Although officials denied that Capellas was distancing Compaq from the merger, some users saw it differently.

"I'm not an expert, but it sounds like [the merger is] over," said John Moon, CIO at Baxter International. "When you have Michael Capellas talking about a Plan B publicly, well, we're just waiting for the last shoe to drop."

Compaq officials said they disagreed. "There is no hidden agenda or secret Plan B," said Arch Currid, a Compaq spokesman. "It would be irresponsible not to have contingency ideas in mind in the event that something could happen, but Compaq is not ready to execute on a Plan B."

Still, some customers wondered how much the merger controversy will distract Compaq's management from immediate business priorities.

Jim Kasdorf, director of special projects at the Pittsburgh Supercomputing Center at Carnegie Mellon University, said the hours devoted by Compaq executives to merger-related issues are "time that's not spent thinking about how to serve the customers best."

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