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The HP-Compaq Merger One-Year Checkup

The HP-Compaq Merger One-Year Checkup

HP says it has scored some 200 outsourcing deals since the merger closed, helping to make it a potential force in a field dominated by IBM and EDS. "Services is one place where the merger has paid off already," Forrester analyst Rob Enderle said.

By Keith Regan
05/01/03 4:00 AM PT

Tradition holds that one-year anniversary presents should be made of paper, but executives at Hewlett-Packard no doubt could have done without the papers presented just a couple of weeks before the anniversary of HP's huge US$19 billion merger with Compaq.

In those papers, two separate research firms reported that the combined HP-Compaq had lost the top spot in the personal computer marketplace to Dell. And although HP tried to shrug off the news, the symbolism, coming as it did just before the May 3rd anniversary of the merger, was not lost on many observers.

"Dell has clearly been the biggest beneficiary of this merger," Forrester analyst Rob Enderle told the E-Commerce Times. Still, he added, the merged HP appears to be doing better than expected, with recent service contract wins a clear outgrowth of the two companies' union.

Tentative Success

Although work remains to be done on both the public image and internal structure of the post-merger HP, analysts said, the first year likely will be deemed a success. They cautioned, however, that it still may be too early to tell how history will view the merger, one of the largest in the high-tech industry's history.

"When the merger happened, people thought the market for technology couldn't get any worse, but in some ways it has," Yankee Group analyst Andrew Efstathiou told the E-Commerce Times. As a result, he said, the combined company's first year must be evaluated in the context of the spending slump.

In other words, as the merger heads in for its one-year checkup, it gets a mostly clean bill of health. But the doctor will want to keep a close eye on the patient, just in case. Where does HP stand right now -- and how far does it still have to go?

On the Upside

Although it has made progress, all is not rosy for HP. Merger critics no doubt took solace in the reports that Dell had leapfrogged HP in the PC race. In addition, for the first couple of quarters after consummating the deal, HP saw its earnings suffer. In fact, red ink flowed freely as HP bought out the bulk of some 17,000 employees slated to be laid off after the merger.

But so far in 2003, the news has been better. HP managed to post a 50 percent increase in profits in the fourth quarter of 2002, though sales did not meet expectations.

Even more important, the company recently landed some high-profile contracts for its consulting and outsourcing services. In March, it snagged a $243 million, five-year deal to provide help-desk and related services to Telecom Italia. Then, in early April, it announced a tentative agreement to provide some $3 billion worth of outsourcing services to consumer goods maker Procter & Gamble over the next decade.

All told, HP says it has scored some 200 outsourcing deals since the merger closed, helping to make it a potential force in a field dominated by IBM and EDS.

"Services is one place where the merger has paid off already," Enderle said. "Some of those bigger contracts, they would not have been able to get without having the Compaq consultants on board."

HP to the Rescue

HP vice president of e-business Marius Haas, a former Compaq executive, told the E-Commerce Times that integration in the online space is "well ahead" of plan.

Haas, who began working on the integration plan a full year before the deal went through, said his business unit was responsible for two of the four main objectives of the merger's first phase: the launching of the HP.com e-commerce site and the creation of an intranet for unified corporate communications.

He added that about 90 percent of HP's biggest customers now are doing business electronically with the company -- a key achievement since HP had been aiming to streamline its business processes. Moreover, HP.com now attracts 1.2 million unique visitors daily and delivers 10.5 million page views, and the company's e-business marketing unit produces 3 million personalized newsletters that provide millions of dollars worth of sales leads each month.

"From a customer perspective, the efforts have really come together," Haas said.

Behind the scenes, other integration efforts have vastly reduced the number of different Web applications in use and have resulted in use of a single analytics method worldwide. Haas said top-down management directives emphasizing that the integration plan was "sacred" helped accelerate the pace of change.

Mixed Messages

However, in other parts of the massive company, the merger's results appear less clear at the one-year mark, according to Forrester's Enderle. He said a lack of true integration has hampered attempts to create a unified HP.

In places, Enderle noted, the company still divides evenly among Compaq and HP, even down to being able to find distinct groups of employees where integration was supposed to have occurred. And the Compaq brand, though absent from the corporate moniker, survives, emblazoned on a recent line of upgraded Presario computers, for instance.

"I don't think people can tell you what the brand image of the new HP is supposed to be right now," he said.

Overall, he added, "[The merger is] probably going a little better than expected, but there's clearly a lot of integration work still to be done."


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