HP/COMPAQ: Merger doesn't mesh says analysts

HP/COMPAQ: Merger doesn't mesh says analysts

Stung with the news that Hewlett-Packard (HP) is acquiring Compaq, some analysts were just beginning to form a tentative view of the merger Tuesday, saying that the advantages of the deal were not completely clear and that the companies are somewhat mismatched.

HP's announcement late Monday that it planned to buy Compaq in a US$25 billion stock purchase took many industry watchers by surprise, given the similarities between the hardware titans.

"I don't think that this is great news," said Roger Kay, an analyst with International Data Corp. (IDC). "They both have similar profiles to begin with." (IDC is a division of International Data Group, parent company of the IDG News Service.)Kay said that it is difficult to see where there is synergy between the two companies, despite HP's strength in the printer market, and possible geographical advantages of melding the companies' operations.

Brian Gammage, a principal analyst at Dataquest, a unit of Gartner, agreed.

"This is a defensive move by two struggling management teams who are looking to find a position in the computer industry," Gammage said. "They are putting together two companies that aren't complementary to protect their falling margins and to reinforce their existing market presence."

Kay concurred. "It would make more sense for IBM and Dell to combine," he said, noting Dell's efficiency and IBM's worldwide presence.

"Picking out of the four major companies (Dell, Compaq, IBM and HP), this is the least complementary pairing," said Gammage, who said that he believed the merger was a product of Dell's price war.

However, Larry Hawes, a senior analyst at Delphi Group, said that despite the companies' similarities, he believed that they do complement one another.

Hawes noted that Compaq's 1998 purchase of Digital Equipment gave the company some great technology, but commented that the company hasn't had the sales and organisation to leverage it. However, Hawes believes HP's expertise can help in this area.

"In some ways, there is an opportunity for them to benefit (from the merger)," Hawes said.

But although saying that the combined company could seize some opportunities in time, the analyst still approached the deal with caution.

"There's no doubt a lot of issues need to be worked out," he said. "Sometimes one plus one just equals two and not two and a half or three," Hawes added, illustrating that the combined company will not necessarily be better than the separate entities.

Tony Iams, an analyst at technology researcher D.H. Brown and Associates Inc. did some different math in terms of the technology resulting from the merger, however.

"I see two pluses, two minuses and a wash," Iams said.

The pluses, according to Iams, begin with Compaq's experience with the Intel platform and the company's ability to support the technology from PCs to back-end servers.

"HP wants to be on Intel and Compaq will help them get there in a big way," Iams said.

Another technological advantage of the merger is Compaq's expertise in clustering, which has never been an HP strong suit, Iams said.

In terms of minuses, "there are too many UNIXes on the table," and it is unclear where they will go with the technology as a combined entity, he said. Another technological concern is how the companies will choose to deal with Compaq's Alpha processor, he said.

The wash is Linux.

"Both companies are involved in Linux, but it's more or less a loss at this point," he said.

While the analysts continued to tally the pros and cons of the merger Tuesday, all arriving at different sums, most industry watchers agreed that a strong impetus behind the move was probably a desire for both companies to insulate themselves from the punishing blows of the struggling IT industry.

"If you look at the state of the industry, it's about how to manage the downside," said Stephen Lane, a research director in IT services at Aberdeen Group Inc.

"One of the first things Wall Street started talking about is how the combined company could cut costs," Lane added.

In addition to keeping costs in check, the companies are also trying to weather the storm by moving further into services, the analysts said.

"The objective is to get into high-end services and reduce the dependency on hardware. They gain scale, and in the services arena size matters," said Gammage.

IDC's Kay agreed that the tough economic climate probably played a part in the companies' decision to combine forces.

"Some companies are being driven into each other's arms by a bad industry outlook," Kay said.

Kay predicted that although both companies have recently announced layoffs, thousands more employees could get the ax as the companies begin to eliminate duplicated positions.

"If they don't lop off 30 or 40 thousand (more jobs), I'll be a monkey's uncle," Kay said.

And while HP and Compaq employees may feel ill at ease while the company streamlines operations, it's not clear that the competitors of the newly combined company will feel the same.

"If I were Dell, I would be gleeful because those guys will be tangled in their underwear for awhile, while I am lean and mean," Kay said.

Delphi's Hawes agreed that Dell could benefit from the time it will take for the new company to stabilize after the merger.

"If Dell has a plan in place, they can take advantage of the economy and may be able to get ahead," he said.

But if the analysts are right, getting ahead is not the name of the game right now - staying afloat is.

It's likely that HP and Compaq themselves will need some time to figure out all the advantages of their merger. In the meantime, the companies will be looking to cut costs and pool their resources.

"Every hardware supplier on the planet is trying to be more of a services player - but first they have to survive, relative to being able to compete when the recovery happens," said Aberdeen Group's Lane.

George Chidi in Boston and Joris Evers in Amsterdam contributed to this story

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