Fiorina's gamble: Recipe for redemption or disaster?
While "wait and see" is probably the most honest assessment any dues-paying member of the punditry dodge can offer on the morrow of the Hewlett-Packard-Compaq merger announcement, a few observations come more immediately to mind:
* If the deal is ever going to come close to justifying the $25 billion price tag, then there needs to be swift and successful integration of both companies' services businesses.
* Dell comes out of all this a huge winner and once again proves that it does direct better than any rival on the planet.
* Customers come out big losers because their choices will ultimately narrow. Hewlett-Packard will keep Compaq around as a brand, but rest assured that the number of products will dwindle as management eliminates merchandise overlap.
Here's the bigger picture.
The first order of business for corporate teams at both companies is to convince customers and investors--not to mention employees--that this is not a panic move by two desperate management organizations who simply couldn't deal with the new world order.
Frankly, that's going to be a hard sell.
The tone of the first day of articles and commentary gauging the announcement has been almost entirely negative. Wall Street reacted with disdain, driving down the shares of both companies. Unlike Compaq's $9.6 billion acquisition of Digital Equipment three years ago, which brought together companies competing on opposite ends of the technology food chain, there's so much overlap between Compaq and HP--not the least being in the PC business--that you have to wonder whether Fiorina knows something about future IT demand that the rest of us don't.
Speaking of the DEC acquisition, Compaq's big move to catapult into the big leagues and compete against IBM was an expensive failure. Compaq took far too long to digest DEC and became so distracted in the process that Pfeiffer was ultimately booted for failing to turn this albatross into a swan.
Back to 2001, the merger announcement takes place during the first year in which the total PC market has actually shrunk. Both Compaq and HP are losing money in the current malaise. It should be noted, however, that Dell continues its full-bore attack to increase its market share. In the midst of a contracting market, Dell still found a way to remain profitable even as it launched a price war.
Short of ordering a nuclear strike on Austin, I have to believe that Fiorina or somebody on her team will order more drastic measures to deal with the Dell challenge. The easiest option would be to rule on a single mode of production and distribution. Compaq relies on a build-to-order model, while HP outsources its systems. This is the legacy of the halfway response each company offered up to the challenge of Dell and the direct-manufacturing model.
Needless to say, Michael Dell hasn't had much reason to lose sleep. That could change if HP moves all its orders to Compaq for fulfillment and along the way wins much better terms from suppliers in return for the promise of more volume of business being thrown their way. I'm ready to be surprised, but you'll excuse me if I reserve judgment for the present.
Beyond a PC-centric world
The fact is that we live in a PC-centric world, and neither company's ability to outgun Dell may account for a lot of the initial grumpiness about the deal. ("What do you get when you add one loser to another? Two losers!") Rest assured, however, that the ambitions of the folks who dreamed up this merger go far beyond making sure that some $899 laptop special at Circuit City catches your fancy this fall.
The big money is in the services business, an area where each company commands substantial assets. As for Dell? It's not even on the map.
Even during an otherwise lousy second quarter, Compaq's services business was a bright spot, accounting for about 23 percent of total revenue. The company has been putting muscle into its services group, taming the organization that grew up in the aftermath of the DEC acquisition.
HP has also beefed up its services arm in the past year. It was even willing to pay $18 billion for PricewaterhouseCoopers' technology services group. Even though the talks fell through last November, HP has moved apace, buying a part of Comdisco for $610 million, hiring some 1,000 service personnel in Asia, signing an airline services partnership with PwC, and broadening an existing deal with Accenture.
But who will run the show--Compaq's Peter Blackmore or HP's Ann Livermore? Both are talented and ambitious execs who have been mentioned as potential CEOs in their own right, and my guess is that neither will be happy laboring in the shadow of the other. As this merger gets worked out, that's no small question. (The current structure has Blackmore running the IT Infrastructure unit with Livermore in charge of the Services group. Seemingly, there's enough of a fiefdom for each to be content--on paper, at least.)
And even if each side gets along swimmingly with the other, the fact is that the growth of IT services in the newly formed HP-Compaq is no sure bet. A lot of Compaq's services revolve around offering basic support and maintenance--maybe good for a steady paycheck, but it tends to be low-margin stuff.
A lot of bloviation will take place in the coming days and weeks about the wisdom of this deal. For the moment, at least, Carly Fiorina has deflected some of the recent criticism of her performance on the job. With a bold stroke of her pen, she's indelibly changed the course of HP's history.
Whether it's a recipe for redemption or disaster, only time will tell.