ZDNet UK / News and Analysis / Business of IT / IT Strategy

HP ready to get down to business

By Ian Fried, CNET News, 7 May, 2002 10:39

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Merger, Compaq, HP, Hewlett-Packard, Resellers, critics, capellas, walter hewlett, brand name

NEWS
Conventional wisdom has it that the hardest part is yet to come for Hewlett-Packard. But after a bruising merger fight, the worst HP can do is live up to its critics' expectations. Unlike past mergers that were filled with anticipation, such as the one between America Online and Time Warner, "scepticism" has been the watchword since the HP-Compaq deal was announced on Labor Day. Even before then board member Walter Hewlett declared his opposition in November, many analysts were panning the deal. Concurrently, and unlike in many mergers, HP and Compaq have worked furiously behind the scenes to be able to operate as one entity immediately after the formal integration. On Tuesday, the new HP will announce its product plans and further executive appointments. Overall, analysts and resellers expect the new HP to keep Compaq's business desktops, notebooks, handhelds and Intel-based servers while ditching its own and to retain many of Compaq's storage products. The Compaq brand name will also survive, the company has said. HP itself is planning for revenue to decline slightly. Furthermore, Hewlett has projected a more pessimistic outlook, and his lawsuit brought to light that many people inside the company are predicting it will have a tough time meeting stated goals. The result has been a battering for HP's stock, which was at $23.21 when the deal was announced last September. Since then, the stock has tumbled about 25 percent, closing on Friday at $17.44. By contrast, shares of AOL Time Warner surged in the days leading up to and following that deal's approval in January 2001 -- although they have fallen sharply since. Even some noted HP detractors say there is nowhere to go but up. "We have been cautious on HP's stock for nearly two years, but the stock now presents compelling value," Toni Sacconaghi, an analyst at investment researchers Sanford C. Bernstein, wrote in a research note Thursday. Sacconaghi also upgraded the stock to "outperform" from "market perform." Sacconaghi argued that a merged HP would be worth $15 a share -- even assuming Compaq is worthless and does nothing more than dilute HP's shares. That, he said, is because before the deal's announcement, HP shares had not traded below $23. Although the fight to win approval of the deal was costly and nasty, the intense pressure and scrutiny has led to better integration planning, boosters say. In a discussion with investors on Thursday, Compaq chief executive Michael Capellas -- who became president of the merged company on Monday -- argued that the three-year product plans established for the new company represent clearer planning than either company was doing on its own. The two companies also found pockets of savings that they didn't anticipate in the beginning. In the future, expenses will continue to drop as the new HP will use its far greater purchasing power to obtain volume discounts from a smaller list of suppliers. "We have found substantial savings in direct procurement (of components) above and beyond what we thought," Capellas said. "It is very clear that you have long-term success with fewer strategic partners." Some say that HP has outspoken critic and former director Hewlett to thank for that. Institutional Shareholder Services, whose March recommendation in favour of the deal provided a much-needed boost, argued that HP's integration efforts were refined through Hewlett's critique. Some analysts agree. "Certainly the attention from Walter Hewlett encouraged them to tune up that planning process," said Martin Reynolds, an analyst for market researcher Gartner. HP may also benefit from another trend: even the deal's critics have grown weary of the process. Hewlett himself has conceded and asked those who had rallied against the deal to try to make it work. "After eight months of it, people are just ready to get on with it," Capellas said. That said, HP still faces all the challenges so clearly laid out by the deal's critics: the mammoth task of trying to integrate two large companies, avoiding customer defection, quieting employee anxiety, and mending relationships with disgruntled investors. Plus, HP will have to act fast. "They've basically got six months to get their house in order," said Reynolds, who noted that although technology spending is slow now, it is projected to pick up by the end of the year, and the merged HP needs to be ready. Capellas offered a similar timeline for HP to demonstrate that things are on track. "You've got about six months or less...to have that very quickly execute in the marketplace," Capellas said last week at a Merrill Lynch investor conference in San Francisco. But HP's integration team has made use of the additional time, doing everything from extending product planning efforts to readying ID badges. In the months that it took for the deal to pass, outsiders connected to the two companies also took action. For example, many Compaq resellers became HP resellers and vice versa, said Joe Burke, a vice president at distributor Arrow Electronics. That will be important, as those resellers will quickly be called on to understand and sell the merged product line. HP plans to publicly unveil details of those product plans on Tuesday and has already begun meeting with key customers and partners. Already, resellers have been reading the tea leaves and trying to position themselves as well as possible to help HP make a go of it. "We've seen quite a bit of proactive moves," Burke said. News.com's Michael Kanellos contributed to this report.
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