Hewlett-Packard acquired Compaq Computer in order to “offer the industry’s most complete set of IT products and services for both businesses and consumers,” according to HP’s press release announcing the merger in September 2001.
One year after the acquisition legally closed, on May 3, 2002, this goal remains just that: a goal.
There have unquestionably been improvements resulting from the merger. It’s also clear that HP has managed to avoid a major disaster as it integrates these two giant companies’ cultures, product lines, philosophies and strategies.
But this mega union can’t be called a success yet. IBM remains by far the largest provider of IT services, both in terms of size and revenue. It also is a mighty competitor in high-end servers. Dell Computer continues to be a thorn in HP’s side in the PC and low-end server business, and a rising threat in printers and handheld devices. HP has met but not exceeded its financial expectations, failing to wow Wall Street.
So the Compaq acquisition and ensuing integration is, most say, a work in progress, that still holds the potential for big successes and big failures.
In other words, at the one-year anniversary of the acquisition, the jury is still out on whether the ultimate goal stated so clearly back in September 2001 will be attained.
Confusion still clouds HP’s channel plan
In bringing Hewlett-Packard and Compaq together, executives needed to blend HP, a company traditionally strong among channel partners in the enterprise, with Compaq, a company in the middle of a push toward a direct sales structure.
That created much confusion and concern among HP’s channel partners, starting in September 2001, when HP announced its intention to acquire Compaq. Although the level of confusion has diminished, HP still has plenty of work to do to clear the air.
The primary confusion and concern centered on whether HP would continue its partner-focused strategy or head toward Compaq’s more direct approach, said Dino Farfante, North America president of Insight Enterprises, an HP partner and reseller since 1995 that last year had $US2.89 billion in revenue.
“We didn’t understand what role we played in the channel,” he said. “We continue to work through that. It’s still confusing, but much less than a year ago.”
In Compaq, HP inherited a strong direct sales organisation that unnerved its traditional channel partners, which feared HP was poised to take over their business in a bid to cut out reseller margins, IDC analyst, Roger Kay, said.
But HP has made it clear it will pursue a hybrid channel strategy, maintaining both a direct and an indirect channel of distribution to remain competitive against Dell Computer and IBM.
“It’s impossible to have just one route to market,” vice-president for sales and marketing for HP’s personal systems group, Jim McDonnell, said. “You reduce your customer reach with only one route, and we want to be able to supply customers in the way they want to buy.”
About 75 per cent of HP’s revenue, across all of its product lines, comes through partners, said Mary McDowell, senior vice-president and general manager for industry standard servers in HP’s enterprise services group.
“We have a strong interest in maintaining that, but if the customer wants to buy directly, we’ll make that available,” she said.
HP gets high marks for its post-merger work on its channel strategy, but that the work is far from over, Gartner analyst, Michael Haines, said.
“There’s still some conflict about where HP plays directly and where do the rules of engagement call for the channel to play,” Haines said. “They still have some work to do before that’s really smooth and clearly understood by all parties, including the end customer.”
“Are we better off now than before? It’s a hard question to answer,” Farfante said. “We’re better off now because we have a stronger partner and because they’re better positioned. But we’re not better off now because we’re still dealing with some of the clarity issues and some of the merger issues.”
Over the next 12 months, HP must continue to execute on its channel strategy, he said.
“I’m very optimistic about HP’s future,” Farfante said.
HP in street fight over PCs with Dell
When Hewlett-Packard (HP) edged out Dell Computer for the top position worldwide in PC shipments by the end of 2002, it achieved one of its goals when it announced its Compaq acquisition. However, Dell was able to fight back and regain the top spot worldwide in the first quarter this year, setting up what promises to be a close race throughout the coming year.
HP’s efforts toward integrating the different PC product lines was key to remaining competitive with Dell, as former HP and Compaq customers would have flocked to Dell had they felt HP emphasised the wrong products, desktop PC industry analyst for ARS, Toni DuBoise, said.
HP pursued a dual-brand strategy with consumers, emphasising the Compaq Presario and HP Pavilion desktops in different ways, she said. HP chose to make the Pavilion into its high-end consumer desktop machine, while the Presario line stepped down in terms of its available features, she said.
Loyal HP consumers tended to be techies, more interested in high-end features and willing to spend more for those features, she said. Compaq customers, on the other hand, were more interested in a budget PC.
This strategy would continue in the second year of the merged company, McDonnell said.
HP would sell the Compaq brand as the price-performance PC, and stack it up against companies such as Dell and eMachines.
The HP side of the consumer PC business would benefit from a focus on digital imaging, with several new products for home entertainment such as new Media Centre PCs and other multimedia applications, he said.
HP’s goal for the HP-branded PCs was to market them against other vendors that made high-end PCs, such as Apple Computer or Sony.
The merged company was able to turn a profit in the personal systems group, earning $US33 million in the first quarter of the company’s 2003 fiscal year, compared to a loss of $US68 million for the combined company in the first quarter of last year.
The company’s flagship printer business remains largely unaffected by the acquisition.
HP expands services but trails IBM
HP’s acquisition of Compaq has given users a new Tier 1 IT services provider that is a viable option to traditional powerhouses such as IBM’s Global Services unit, Computer Sciences Corp (CSC), Accenture and Electronic Data Systems (EDS).
The merger increased HP’s services staff to 65,000, gave it new customers and significantly expanded its services portfolio, which covers three broad areas: technical support and maintenance; outsourcing; and consulting and integration.
Analysts give good marks to HP about its post-merger services strategy and results so far. But they caution that if HP’s ultimate goal is to match IBM’s services prowess, much work remains to be done.
IBM Global Services, which is the world’s largest IT services provider, has more than twice as many employees, about three times as much revenue, a bigger services portfolio and a leadership position in name recognition and reputation.
So one year after the Compaq acquisition, its clear clients will not find in HP the breadth and depth of IBM Global Services. But they will find that HP has significantly more to offer than it did a year ago.
“Generally, HP is being perceived as a viable service alternative by many companies out there,” IDC analyst, Traci Gere, said.
HP realised that it was still the challenger to IBM Global Services, and that it must continue to strive to improve and grow, vice-president of marketing, strategy and alliances, Juergen Rottler, said.
“We’re very satisfied with the progress we’ve seen so far, but it’s only an inspiration for us to push even harder, because we’re the challenger,” he said.