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3/8/2002
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Leaning HP's Way

By a small margin, business-technology managers favor the acquisition of Compaq.

The campaign surrounding Hewlett-Packard's offer to buy Compaq is a barn burner, with each side stumping like politicians in the last days of a close contest. But in the battle to win shareholder votes, one important constituency--business customers--largely has been left out of the public discussion. As it turns out, business technologists favor the deal--but by only a small margin.

Slightly more than half of 200 business-technology professionals surveyed last week by InformationWeek Research believe the deal would result in a better computer and IT services company. (For the full survey, go to informationweek.com/879/charts.htm.) Nearly three in four say a combined company would realize most or some of the benefits promised by the executives spearheading the deal. But a large minority has doubts: 44% don't think the merger would result in a better company; 34% are flat-out against it. And about a third don't think the companies will be able to successfully blend their products and cultures.

Andy Kuhn, owner of A.W. Kuhn Engineering, a Mississauga, Ontario, consulting and engineering firm for metal-working companies, says a combined HP and Compaq would be stronger, putting him among the 45% of respondents who favor the deal. "There are certain products in the pipeline that a combined company could pull off," he says. For example, HP and Compaq have been working separately on what's called trusted-client computing, an initiative to make online transactions more secure, says Kuhn, an HP shareholder. "Both companies are working on this very system, and they would have critical mass to get this technology developed quickly," he says.


Jim Pierce -- Photo by Jeff Sciortino

Anixter VP Pierce says he's not impressed with HP CEO Carly Fiorina's argument that the Compaq merger would help prop up slumping PC sales.
And yet, 51% of InformationWeek Research survey respondents say having fewer vendors is bad for technology buyers. This means HP and Compaq executives still have some convincing to do. "As a customer, I've yet to see where the benefit is," says Jim Pierce, a VP at Anixter Inc., a Skokie, Ill., company that sells $3.1 billion worth of wiring and networking products annually. "They haven't articulated to me in a way that I can understand it." Pierce says he's unimpressed with HP CEO Carly Fiorina's argument that a combination would prop up slumping PC sales: "For their profit and loss it would be OK, but is that going to turn into savings for me as a customer?"

Anixter runs more than 100 Windows servers from Compaq and some HP Unix boxes, but it's been steering toward Sun Microsystems' Solaris platform in recent years in an effort to standardize. The proposed deal reminds Pierce of Compaq's buyout of Digital Equipment Corp. in 1998, after which his hopes were dashed for the first commercially available 64-bit-processor machines. "I hoped they'd push the Alpha chip, but instead they buried it," he says. No doubt more products would be interred after this buyout, but HP-UX is a likely survivor. And Compaq's high-end Himalaya servers, obtained when Compaq acquired Tandem Computer in 1997 and popular with financial institutions, would live on, CEO Michael Capellas says. Less clear are plans for Compaq's OpenVMS and Tru64 servers.

Concerned customers may take some comfort in the fact that Capellas has identified key lessons learned from Compaq's acquisition of Digital. Among them: Product road maps must be established by the time the deal is approved, and customer-facing organizations, such as sales and support, must be the top priority.

HP board members, in a mailing to shareholders last month, argued that the new HP would dominate the Windows and Linux server markets, which are growing at 20% and 30%, respectively. The combined company also would become the market leader in storage and management software. Its services staff would double to more than 60,000 associates, though that's still just half the size of IBM's services unit. The PC business, HP says, would get a boost from Compaq's direct-distribution channel.

chartBut survey respondents aren't so sure about how all that would translate into product improvements. In fact, the survey revealed no consensus on which products or services likely would get better after the acquisition. Only 43% of respondents expect post-deal improvements in PCs and about 30% in Linux, Unix, and Windows servers.

A lingering concern is that a combination would muffle innovation. If the acquisition goes through, innovation could suffer for a year or so, says Rob Enderle, a research fellow at Giga Information Group. "A large-scale merger like this tends to do a lot of damage to innovation. New and innovative products will fall on the back burner until the merger is settled."

Others point out that although nothing inherent in the HP-Compaq combination lends itself to greater innovation, nothing glaring should hinder it. "Both companies have an overabundance of great technology," says Paul McGuckin, a VP with IT advisory firm Gartner. "Their weakness has been sales and marketing."

It was a Compaq sales slip-up that turned Wilson-Hurd, a $15 million maker of aluminum and plastic in Wausau, Wis., from Compaq to Dell Computer. "We had issues involving Compaq's EVO T20 terminals," says network administrator Scott Berg. "We wanted to outfit them with touchscreens and bar scanners and were told by salespeople that we could. Then when we talked with support, they said it couldn't be done." Combining the two companies could "force them to improve," he says.

Mark Wilson, the VP of leisure travel at Travelocity.com in Dallas, is moving ahead with an installation of Compaq Himalaya servers. "I don't see any reason to believe support would stop or any reason to be concerned," he says.

Meanwhile, buyers and shareholders alike continue to read the tea leaves. Standard & Poor's last week lowered HP's corporate credit and senior debt ratings because of the deal's risks. Perhaps balancing that view, the Federal Trade Commission ruled that the deal wouldn't impinge competition, and Institutional Shareholder Services, an advisory firm for more than 700 institutional investors, blessed it.

Advocates of the acquisition will be heartened to know that 58% of survey respondents say they would vote in favor of the combo if they could. But most can't--only 19% own shares in HP or Compaq. The vote is next week, so the matter should be resolved shortly--providing there are no hanging chads on the ballots.

-- with Martin J. Garvey

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