NW,
Like the majority of HWP and CPQ (ex) employees, I am no supporter of this merger with HWP.
The product overlap (PC/Server/Storage), the channel overlap (particularly retail), the size of the combined company (dilution), the cultural clash (TX/CA/MA) are some of the obvious drawbacks of such a merger.
All have been already extensively covered by Gartner and the likes, one just needs to search Gartner.com to contrast the customer perspective with HWP/CPQ PR.
More importantly, here is a list (not exhaustive) of my pros and cons to help you fellow SI investors make up your mind.
Merger Positives:
i) IPF Synergy. Both CPQ and HWP actively support INTC's Itanium/McKinley transition. By backing the IPF transition early, one should expect Fortune 500 corporations planning to migrate to the new architecture to select de facto the new HWP.
Having said that, the other RISC vendors (IBM & SUNW) are not without counter arguments to prevent the deployment of the new IA-64 architecture and consequently the erosion of the UNIX market. Look at IBM's new Regatta server as a formidable "scale up" solution to counter INTC/HWP/CPQ "scale out" architecture in their battle to win over first tier application developer support.
ii) Critical Mass in Global Services. Neither HWP nor CPQ has the critical mass to compete with IBM Global Services world wide. In a market of IT mass consumption, only the few companies expert at mass customization (services centric) will maintain high customer retention rates, higher margins and eventually survive.
iii) Operational & Financial Economies of scale. A critical factor in industry standard computing when a company admits it lacks the R&D effort to leap frog competitors with new product solutions. Despite their strong IT legacy, neither CPQ nor HWP managed in the 90es to capture the emerging networking (Cisco, 3Com) and internet appliance markets (NetAppliance). Even in the storage market, HWP/CPQ core expertise and market share remain in DAS and NAS instead of SAN (Brocade, EMC).
iv) Combined Financial Services (leasing) to serve a larger client portfolio (Fortune 500 global accounts). FYI, Compaq Financial Services was the fastest growing BU in 1999-2000. I suspect the same could be said of HWP's financial services' arm. A combined entity would be better positioned to compete with IGS and GE Capital to address the capital needs of the emerging IT Utility.
Merger Negatives:
i) Mergers never work (80% failure rate) and certainly not at CPQ and HWP.
The M&A record at CPQ is questionable (DEC, Thomas Conrad, Networth...). IMO, the only successful acquisition was Tandem because there was no integration (no product/market overlap with ISSG). TDM simply became a BU of CPQ. Clear and easy lego brick system.
As for HWP, so much for their merger with PW...
In conclusion, M&A expertise within Fortune 50 companies remain seldom. Hence their heavy reliance upon strategic consulting houses like McKinsey or BCG.
GE (the only US conglomerate praised by Wall Street ) "can" merge. Cisco "can" acquire. The problem for HWP/CPQ is that neither Fiorina nor Capellas can display the skills of Jack Welch or of the duet made up of John Chambers and Michael Volpi. Yet, they have engaged their respective companies in a $87 billion merger...
ii) Fiorina (CF) and Capellas (MC) clinched this deal to save themselves.
Remember last summer when MC promised to turn around CPQ within 180 days (i.e. before the year end). He knew he was surely not going to make it. Likewise, CF had eaten her white bread at HWP and faced greater resistance from the old guard (addicted to the consensual HP way)
iii) HWP and CPQ channel partners will seek alternative suppliers to balance their portfolio. Never put all your eggs in the same basket.
iv) The FTC and/or the European Commission will surely sue / veto the new HWP (78% of the US retail market, 55% in the UK, 45% in Germany and France)
v) The "DEC legacy" is acutely aware it will fall victim of the HWP/CPQ integration. It will take billions of dollar to compensate former DEC employees not to mention the Alpha/Tru64 customer base. Consequently, do not expect the merger to be acreative before 2003/2004.
IMO, if Compaq should merge with someone, it would be with CSC. Now, I suggested it this summer (CSC in the mid 30es and undervalued vs EDS, now at $48) to my contacts at Compaq. The reasons to merge with Computer Sciences were and remain obvious: customer base, genuine mass and expertise in professional services, competitive offering vs EDS (in my mind HWP/CPQ foremost IT Utility competitor in the next decade).
So what's next for CPQ?
Do no read me wrong when I criticize MC and CF. One does not climb the ladder up to become CEO without outstanding career management skills. I suspect both realize that CPQ/DEC/TDM and the new HWP conglomerates have been, are and will be heavily discounted by Wall Street. I remember also that CF was CTO at Lucent before joining HWP. Hence, she must have been part of the internal political game before the AT&T spin offs and carve outs took place.
I trust Fiorina to carry out a similar plan within the new HWP in 2002. This is the only way to price the separate business units / groups of CPQ (and HWP? here I lack insider data) at fair market value. If the merger is not completed, then expect MC or his heir Peter Blackmore (in contention with Mary McDowell) to execute the same plan under the CPQ logo. If they don't do it, it is my guess that Wall Street will not wait for Ben Rosen to devise a plan B.
Could be another "Barbarians at the Gate" story in the making.
Ask KKR if they fancy CPQ as they did RJR / Nabisco...
Over to You.
The Fogg |
