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Compaq will still leave HP short on services

Users, analysts are up-in-arms about HP's acquisition of Compaq. That doesn't, however, mean the move was a bad thing.

Brute force, earnestness and an air of desperation seemed to make up the prevailing mood at the New York announcement of the acquisition of Compaq by Hewlett-Packard. But that doesn't mean it's the wrong thing for the companies to do.

The main reason for the deal appears to be economic, even though HP chairman and CEO Carly Fiorina and Compaq chairman and CEO Michael Capellas both insisted at the event on Tuesday morning that the move was based on products and customers.

HP executives will run three of the four units of the new HP. The Compaq brand will disappear, although a few "sub-brands" will be retained, said Fiorina, which points to things like NonStop Himalaya, Tandem and iPaq.

By combining the two firms, HP will cut 15,000 staff and save up to $2.4bn annually by fiscal 2004, which starts in November 2003 for HP. But before then, it doesn't expect to be generating more than the sum of the two parts ? in fact, up to 5% less in sales for fiscal 2002 and 2003.

There was a lot of talk of leadership in the consumer and small to medium-sized business computer markets, and Fiorina said HP would also be "challenging IBM in the enterprise space." She admitted, however, that there would still be work to do in services, software and storage, even after the integration of Compaq.

In terms of services, "solutions" are what it's all about, HP said. But it said surprisingly little about how its services division will be made more competitive with those of IBM and EDS as a result of the deal. Compaq adds 38,000 staff in its services division to HP's 27,000. But of that 65,000 total, 40,000 are in support, with just 10,000 in outsourcing and 15,000 consultants.

Fiorina acknowledged the importance of outsourcing and consultants and promised to make "strategic moves" to boost those businesses, as well as continue to partner with Accenture, PricewaterhouseCoopers and others. That means that, despite this deal, HP is still shorthanded and looking to buy a consulting business, it would seem. Meanwhile, IBM has 150,000 in its Global Services, and only about 15% of those are in support ? hence its high margins.

Fiorina said the move will boost HP's storage efforts. It's not clear, however, what will happen to Compaq's bidirectional storage reselling agreement with IBM, signed last year. It would seem to be in jeopardy as a result of this deal.

There appears to be only a small amount of overlap in software. Things like Compaq's clustering software and HP's OpenView systems management software have no real alternatives at the other company. The addition of Compaq will add Open VMS, Tru64 Unix and the NonStop kernel to HP's portfolio of HP-UX, Windows, Linux and MPE/iX. That should make life interesting and put a stop to the snide comments about IBM's multi-operating strategy.

On the consumer side, Fiorina refuted claims that, out of Dell, HP and Compaq, Dell is the only one, to run a (mostly) profitable PC business, saying that commentators should look more closely at what Dell includes in its PC business figures. Fiorina claimed that HP has a profitable consumer PC business, while Compaq's commercial PC business is profitable, which points to the possible elimination of Compaq's consumer brand (Presario) and HP's commercial PCs (Brio, Vectra and e-PC).

Most of the cost savings will come at the low end of each company's business ? that much is clear. So we should expect some pretty drastic changes in the PC and PDA product lines. It looks as if Compaq will be using more outsourced manufacturing for its PCs, following HP's lead. Capellas said there would be no changes to channel strategy until the deal closes next year. So, all in all, it's not yet clear how the deal will enable HP-Compaq to compete more effectively with Dell.

While the integration team, led by HP's Webb McKinney and Compaq's CFO Jeff Clarke, works out exactly what has to be done to merge the two organizations worldwide, and while the antitrust regulators in the US and Europe sift through the deal, the two companies have to keep their businesses running effectively and not scare off customers through uncertainty over which products will stay and which will go. Although Fiorina and Capellas would not reveal the list of products to be scrapped, she said it has already been drawn up.

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