March 08, 2002 18:43
Compaq CEO Could Come Out Ahead in Hewlett-Packard Merger
By Crayton Harrison, The Dallas Morning News
Mar. 8--The two chief executive officers took over their companies three years ago, just in time for a devastating slump in their industry. Both have now staked their companies' futures on a giant merger.
But their reputations have gone in different directions.
One of the CEOs, Hewlett-Packard Co.'s Carly Fiorina, is widely believed to have staked her job on the merger.
The other, Compaq Computer Corp.'s Michael Capellas, will almost certainly keep his job even if H-P shareholders decide in their March 19 meeting not to buy his company for about $21 billion.
H-P was in much better financial and strategic shape than Compaq before their Sept. 4 merger announcement, and probably still is, analysts said.
But the infighting at H-P has left Ms. Fiorina's public image battered, while H-P's campaign to prove that Compaq is an attractive purchase has made Mr. Capellas look like a financial wizard, said Rob Enderle, an analyst with Giga Information Group in Santa Clara, Calif.
"Carly's actually building Compaq up as the better of the two firms, so Capellas looks pretty good," Mr. Enderle said. "The way they're talking, if this merger goes through, they might as well get rid of Carly and go with Capellas as CEO."
It wasn't always this way. Ms. Fiorina and Mr. Capellas took over their jobs within three days of each other back in July 1999.
Ms. Fiorina was a rising star in the technology industry, coming to H-P from her presidency of Lucent Technologies' global service provider business. Her job, analysts said then, was to energize an already well-positioned company with her marketing savvy.
Mr. Capellas had been chief information officer for just eight months before a management shake-up made him interim chief operating officer. Industry watchers speculated then that he'd be a puppet for chairman Ben Rosen, who had led the charge to fire previous CEO Eckhard Pfeiffer.
Only a year after they took over, both executives ran into a slump in PC sales that continues today. Both said they'd steer their strategy toward more diverse products and stronger services businesses.
Ms. Fiorina spent months on a plan to acquire the consulting division of PricewaterhouseCoopers, but eventually decided against it. Mr. Capellas, meanwhile, completed the task of integrating two companies Compaq had acquired before he took over -- Tandem Computers Inc. and Digital Equipment Corp.
Those two acquisitions had been widely viewed as failures because of the steep costs of integrating the companies. In fact, some analysts still think they were mistakes, and dissident H-P board member Walter Hewlett has pointed to them as illustrations of the folly of high-tech mergers.
But in its report this week recommending that H-P shareholders vote for the merger, advisory firm Institutional Shareholder Services pointed to the Digital acquisition as part of a learning curve that would help Mr. Capellas implement the new merger.
The acquisitions have helped Compaq build its products and services in the long run, said Peter Blackmore, Compaq's vice president of sales and services.
"The first 18 months of the Digital acquisition, we didn't cover ourselves in glory, but today our services are very strong because of it," Mr. Blackmore said. "The management that's here now is the management that made it work."
Essentially, Mr. Capellas brought a troubled company into a position where it could be bought, said Charles Wolf, an analyst with Needham & Co. in New York.
"I think the shareholders are reasonably pleased with what he's done with the company, although it's not been all that great," he said. "With the crappy economy, with a horrendous merger that they had to consummate, he's done probably the best job he could."
Since the merger announcement, Mr. Hewlett's team and H-P have traded barbs almost every day. On Thursday, the two camps debated over the accuracy of a news organization's survey of customers and over the significance of Standard & Poor's downgrade of H-P's bond rating from an A-1 plus to an A-2.
H-P shareholders have hammered the company's stock, lowering the value of the stock-swap acquisition to $21 billion from the original price of $25 billion.
Some shareholders are simply not sure Ms. Fiorina can successfully put the two companies together, said Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray in Minneapolis.
"I don't think she has the track record to back up what she's saying about integrating these companies," Mr. Kumar said. "Clearly that's an issue for a lot of investors."
Shares of H-P fell 18 cents to $20 and Compaq shares rose 17 cents to $11.15 in New York Stock Exchange trading Thursday.
While Ms. Fiorina and H-P fight internal battles, Compaq has had no dissident to fight, and that may be Mr. Capellas' biggest saving grace, said Mr. Enderle of Giga.
"Nobody's hunting him," Mr. Enderle said. "If this merger breaks apart, he still comes out ahead."
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