HP to acquire Compaq in stock swap

Merger creates $87 billion entity; firms expect $2.4 billion savings in product, employee consolidations

HP took the biggest bite of another firm in the company’s history this month, announcing it will take over PC and server maker Compaq in a deal valued at $25 billion when it was announced. Members of both companies’ boards of directors have agreed to the merger. The remaining company will be called Hewlett-Packard — but the group that includes e3000 operations will be led by Compaq’s executive vice president of sales and services, Peter Blackmore.

HP’s CEO Carly Fiorina, who will become chairman and CEO of the combined firm, said the deal was “a game-changing move, and we are playing to win.” The merger, announced on the US Labor Day holiday, is a better fit in bad economic times, according to Fiorina.

“I think this deal makes particularly good sense in tough times for technology, because those tough times illustrate there is an opportunity to get more cost-effective and efficient,” she said. “Customers are saying, ‘I haven’t gotten enough return on my investment.’ ”

The merger makes one victory complete for HP. Its RISC strategy was assaulted by Digital in the mid-1980s, as DEC took advantage of delays in the HP 3000 PA-RISC introduction. HP now owns what remains of Digital’s technology, since Compaq acquired Digital in 1998. Digital’s war cry during that RISC delay was “Digital has it now.”

Seasoned HP 3000 observers noted the Digital win, but wondered about the work to integrate so much technology.

“I suppose the operative phrase is ‘HP has it now,’ ” quipped Michael Berkowitz, systems manager with Guess, Inc. “But let’s see: seven current operating systems, (MPE/iX, HP-UX, Linux, NT, OpenVMS, Tru64unix, Non-stop Himalaya); two sets of storage makers (XP, Digital Storage); head-to-head PC sales at all levels (home, desktop work, servers, portables, PDA). About the only non-overlap is printers, scanners and similar peripherals. Yeah, it should only take about a hundred years to put this together.”

HP’s CEO said the two companies looked hard at the alternatives to merging, and believe this is best for both firms. “We think this is one great day for the people of HP, and the people of Compaq,” Fiorina said in an investor press conference. “It doesn’t make sense to get out of the PC business, because there’s still growth left in that business,” she said.

The move between the Nos. 2 and 4 PC makers — Dell is No. 1, IBM No. 3 — comes at a time when the PC marketplace is suffering its worst downturn in more than a decade. HP said that Michael Capellas, the Compaq CEO who took his post at nearly the same time HP’s CEO Carly Fiorina joined HP, will become president of the combined company. Capellas said the acquisition, which isn’t expected to complete until next year pending antitrust review, creates a computer entity unlike any other.

“We are creating a new kind of industry leader,” Capellas said in a joint press release, “one founded on customer success, world-class engineering, and best of breed products and services.”

The merged company expects some of those products and services will be shutting down as a result of the deal. “We will not be making broad announcements about surviving product lines too early, because we want to have transition strategies in place first,” said Fiorina. “Are we prepared to do divestitures to capture the value of this? The answer is yes. We are going to be very careful… about what are the surviving product lines.”

Blackmore, who will head the segment of the new HP including the e3000 division, has been responsible for the sale of Compaq products and services worldwide. His Compaq organization encompasses Compaq Global Services, Compaq Financial Services, Global Alliances and Quality and Customer Satisfaction, as well as alliances with the company’s distribution partners.

Blackmore joined Compaq in 1991 and was first responsible for the company’s Europe, Middle East and Africa business development, including channel strategy and major account marketing in that region. Prior to Compaq, he was Marketing Director for Rank Xerox UK, and held senior sales management and marketing management positions in the UK and internationally for Burroughs Corp. He was educated at Trinity College, Cambridge, and has an MA in Economics.

This summer Blackmore was working on a unified, “Compaq No Risk” offering that would include storage on demand, servers on demand, and PC and access as a utility. He also simplified Compaq’s structure to three sales units in each country: access, enterprise and services.

In a press conference announcing the merger, Capellas said the merged company would move quickly to simplify its PC engineering. “We will move very quickly to engineering of standard subcomponents, so we will have cost efficiency. One plus one will not equal two when we consolidate the product sets. There will be simplification of the product line.”

HP said its shareholders, who saw their stock sink to a one-year low the day before the deal, can expect the merger to net “significant cost structure synergies,” but little before fiscal 2003. HP expects the synergies to reach $2.4 billion annually during fiscal 2004, but savings will come to just $390 million over the 2002 fiscal year. The savings will come in part from product rationalization, another way to describe dropping of product lines.

US and European Union approval of the merger might require overlapping products to be dropped, prompting more elimination of jobs. HP estimated layoffs of 15,000 as a result of the merger. HP wasn’t ready to say where the job cuts would take place.

The deal, which still needs to be approved by shareholders, will also offer the shareholders “efficiencies in administration, procurement, manufacturing and marketing; and savings from improved direct distribution of PCs and servers,” according to an HP press release. Compaq shareholders receive .63 of a share of HP stock for each Compaq share they own in a no-profit, fixed value deal.

HP said the structure of the new company will comprise four operating units: IT Infrastructure, which includes the HP e3000 business as well as other servers, storage and software; Services, a group with 65,000 employees today; Access Devices, Compaq’s term for PCs and handheld units; and Imaging and Printing. Five Compaq directors will join the HP board as part of the deal. Blackmore is the only Compaq executive to head one of the new operating units. HP executives named to the new units are:

• Duane Zitzner, currently president of HP’s Computing Systems which includes the HP e3000 operations, who will now head up the largest group, the $29 billion Access Devices;

• Vyomesh Joshim, currently president of HP’s Imaging and Printing Systems, who will head up Imaging and Printing;

• Ann Livermore, currently president of HP Services, will be leading the Services group.

HP’s current Chief Financial Officer Robert Wayman is leading the combined company as CFO.

Rank appears to be important in the HP description of the merger. Company officials said “the new company will rank No. 1 worldwide in revenue for servers, access devices (PCs and hand-held devices), and imaging and printing.” IBM remains number one in total IT revenues, Dell number one in PC market share.