March 9, 2002, 10:59PM
Melding cultures high on to-do list
Compaq, HP forge a common ground
By MICHAEL DAVIS
Copyright 2002 Houston Chronicle
ALO ALTO, Calif. -- At the original headquarters of Hewlett-Packard Co., the offices of founders Bill Hewlett and David Packard have been maintained exactly as they were the day each retired.
The furnishings are early '60s modern, there is pocket change on one desk and notepads with the men's scribbling on them. The offices are hallowed ground to the employees who work nearby.
At Compaq Computer Corp., there is little such sense of history. The company, with only two decades of existence, has continually reinvented itself. If the pending merger with HP goes through, the Compaq name will be history as well.
Combining the two companies if the deal goes through -- and that is a big if -- will be a daunting task on a number of fronts. The differences include issues in manufacturing, finance, logistics and the touchiest of all: cultures.
HP's history dates to before World War II. The company is a cornerstone of the Silicon Valley and has a deep-rooted culture that came from the vision of its founders, who met in the 1930s at Stanford University.
The company's first product was an audio oscillator used to test sound equipment. The company's first big order of the machines was from Walt Disney, who used them to produce the soundtrack to Fantasia.
Compaq's story begins with the founders sketching out the concept of the first portable IBM PC clone on a napkin in a House of Pies. But the founders are long gone from the Houston company, which has repeatedly changed CEOs as crises in the industry have forced change.
The future of HP would be forever altered by its match with Compaq, having a profound impact on what is now the dominant tech employer in Houston.
Currently the companies have 600 people working on the team to integrate the companies, and that number is expected to grow as the day of reckoning approaches.
The nickname for this key group says a lot about the challenges.
The team members have been dubbed "cultural astronauts," because of the groundbreaking and daunting task they face in integrating the companies.
They are also known as the clean team because they have to work outside normal channels at the two companies, which are still competitors until the deal closes.
Melding the cultures is the least tangible element of the integration but still one of the most important to ensure the merger lives up to its promise.
Compaq learned the hard way about the risk of putting together companies with different ways of doing things when it took over Digital Equipment Corp. More than a year after the June 1998 takeover, Compaq Chief Executive Michael Capellas said that because of the culture clash the integration of the companies had not moved as quickly as it should have.
Indeed, many analysts say the nagging problems Compaq took on after it bought Digital may appear minor in retrospect compared with what the company would face in merging with HP.
"This is the largest merger ever in computer hardware, and none of them have worked out," said Art Russell, analyst with Edward Jones in St. Louis. "We believe the combined company will lose market share because it will take 18 to 24 months to complete this, and during that time its competitors will be taking market share away from them."
The HP culture is defined by a philosophy called The HP Way, which is also the title of a book about the company by David Packard.
"HP by far has the stronger culture," said a source on the cultural integration team. "Compaq is by no means as strong a culture coming into this. So for that reason their population isn't as concerned with, `What are we conserving or preserving?' "
Compaq is not likely to be completely overwhelmed culturally. The ability the company has developed to adapt to rapid change could be an asset to the new company.
"We bring a bias toward decisiveness and quick action, and clearly HP would like those sorts of attitudes and capabilities to survive," said Mike Winkler, executive vice president at Compaq.
The potential differences appear in a number of areas, such as the pace of decision-making, picking the final product line, and how the companies handle finances.
"From the very beginning we geared up around cultural integration right along with product road maps and organizational design and financial structure," said Susan Bowick, vice president of human resources at HP. "The goal that we have is one strong new company and one strong culture."
Many of the decisions about which company's process or facility to use in the combined company are obvious. If one of the companies recently modernized in a particular area, that will almost surely be retained.
"Both companies are engineering-oriented, facts-based kind of cultures, and if you look at the characteristics of the system, then the decision seems to always just fall out right at you," said Robert Wayman, chief financial officer at HP.
HP workers do appear concerned about what elements of the company's legacy will be maintained with the new company. A recent survey of HP employees living in Fort Collins, Colo., found that 65 percent opposed the deal. Surveys of HP workers in Boise, Idaho, and Corvallis, Ore., found a similar dissatisfaction with the merger.
Shareholders of HP are to vote on the deal March 19; Compaq shareholders will vote March 20.
The most prominent opponents reflect how important history is at Hewlett-Packard. Lined up against the deal are the descendants of Packard and Hewlett. Both have said they will vote their combined 18 percent of HP's shares against the merger. Company officials say the proxy fight has not hindered the integration work.
"The proxy fight has created a level of anxiety and uncertainty, which for the most part has not impacted the work the integration teams are doing, but it's out there and it creates more uncertainty," said Webb McKinney, who is heading the integration effort for HP.
The deal was roundly criticized by analysts and investors when it was first announced, but some institutional investors have since announced they support it. The outcome of the merger is still too close to call. Most analysts give it a 50-50 chance of winning approval.
"The two companies compete with each other, but for the most part with complementary strengths," Wayman said. "There is a lot of overlap in the cost structure, but the product overlap is not as severe as one might think."
Company officials maintain that the reasons for combining the two companies remain as relevant now as they were when the deal was announced. They expect to be able to wring out $2.5 billion in cost savings, largely through the layoffs of some 15,000 workers, or about 10 percent of its work force.
They won't predict exactly how this will affect Houston.
Employees will begin receiving notices soon after the deal closes, Wayman said. In Houston there are corporate-level jobs that have "certain characteristics" that make them more likely to be shed than others, he said.
"Some people may assume that if they want to stay in Houston, it's probably wise to start looking around," Wayman said.
The companies have not disclosed how much the layoffs will cost, but Wayman said it will not be a "break the bank," number.
"When Hewlett-Packard reduced head count by 6,000, our cost was about $300 million; Compaq reduced around 8,000 this past year and the cost was about $500 million," Wayman said. "Both of these companies are in excellent shape financially, their balance sheets are strong, and they have relatively low levels of debt."
The new company will have debt of about $8 billion, cash on hand of about $8.2 billion, and a debt-to-equity ratio of about 30 percent.
The company projects its costs savings alone to translate into $5-$9 per share in increased value, and that the deal will increase earnings in the first full year of operation by 13 percent.
As the companies top officials lobby Wall Street, the rank and file are preparing for the difficult task of combining the two companies in real life.
The integration team is preparing a road map that will let customers know what products they can expect to see from the new company. How long the Compaq brand name will remain on retail shelves is unclear, but indications are that it will be around at least as long as the current generation of products.
"HP is the name of the company and the primary overriding brand, but the Compaq brand will continue to exist," Winkler said.
The Compaq name on the company's Houston headquarters will be coming down, but the new company will maintain a "very strong" presence, Winkler said.
What exactly will stay in Houston will be determined by which Compaq products are retained. Operations related to those products such as engineering, development, planning and marketing will likely be retained, Winkler said.
"The supply chain is determined by the product road maps, and where Compaq products are the surviving products in the converged HP, the supply chain will also be retained," Winkler said.
For planning purposes, the integration of the two companies has been divided into three phases.
The first phase has already been completed and included creating integration teams and establishing what the scope of the new company will be.
The second phase includes deciding priorities for the first day after the close and quality assessment. The third phase deals with preparing for operations after the closing date, or as it is known, C+1.
In the procurement area, teams are looking at how much each company has paid for parts and where they can use the combined company's increased size and leverage to bring prices down.
Other areas such as melding the companies internal computer systems will likely take months. When the two teams are confronted by a decision of which approach or system they prefer for the new company, they are employing a process dubbed "adopt and go."
"We have two companies, two sets of systems. We have to decide whose system are we going to use," Wayman said. "We are not going to try to redesign a new perfect set of systems. We are going to select, category by category, where we have the best system and go forward."
Things as mundane as a voice mail system are falling under this adopt-and-go plan. HP has a global voice mail system; Compaq has a regional system. The winner: HP.
In financial reporting, Compaq has what Wayman describes as a better "high-level consolidated reporting engine," so that will be the method of reporting the new company will use.
The companies' benefits and employee evaluation processes are already similar, in some cases using the same wording in guidelines, Bowick said.
"Both companies know they need a change. Nobody is arguing that," said the HP source on the cultural integration team. "There is a strong willingness to get on with the future."
The team is trying not to focus only on differences between the companies but is also trying to find common ground. Still, some "hot spots" have been identified.
"Hot spots tend to be in the area of accountability," the source said. "How are we going to build accountability into the new culture? We want to make sure the process and structure will clarify accountability."
The team is intentionally not trying to blanket employees with new cultural edicts but rather spending the first 90 days or so locating hot spots and dealing with them case by case.
"I think the differences will be subtle but profound," the source said. "We have entered a new era that will require different behaviors. If we really do this well, we will have found a way to successfully honor our past." |
