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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: PCSS who wrote (96217)	3/18/2002 6:36:44 PM
From: PCSS	Respond to of 97611

Can HP break the curse of the high-tech merger? 3/18/2002 6:11:53 PM By Andrea Orr PALO ALTO, Calif., March 18 (Reuters) - It seems logical that when two big, powerful companies join forces, they will create a new entity that is even bigger and more powerful. But mergers of high-tech companies often defy logic, as critics of Hewlett-Packard Co. (HWP) 's proposal to acquire Compaq Computer Corp. (CPQ) have been warning Hewlett shareholders as they prepare to vote Tuesday on the deal. The history of failure among high-tech companies trying to buy their way to market leadership stretches from some of Xerox Corp.'s (XRX) earliest acquisitions in the late 1960s to the $6.7 billion merger in 1999 of Internet companies Excite and AtHome Corp., which ended up flat broke in less than three years. Studies show that mergers of all kinds result in write-offs or divestitures more often than they enhance shareholder value. But high-tech mergers are particularly risky, critics of the Hewlett-Compaq deal are warning on the eve of the shareholder vote. "Merger integration is a time-consuming process and in high-tech, the typical product cycle lasts six to 18 months," said David Yoffie, a professor at Harvard Business School whose research has been cited by HP dissident director Walter Hewlett as he sought to build opposition to the Compaq deal. Yoffie's core argument is that the fast pace of technological innovation can cause a company to lose its competitive edge in the few months it takes to integrate its new assets. "The difficulty is that any delay in integration leads to delays in product shipment, development, and a slowdown in the company's road map," he said. Among the many troubled deals he cites are the 1969 acquisition of Scientific Data Corp. by Xerox and AT&T Corp's (T) 1991 acquisition of computer maker NCR Corp. Both combinations resulted in large write-offs. TAKING RISK MAY BE THE ONLY CHOICE More recently was the 1999 acquisition of the fast growing Internet portal Excite by the high-speed Internet service provider AtHome Corp, for $6.7 billion. At the time, $6.7 billion seemed a fair price to pay to build a dot-com powerhouse that could control both Internet access and content. Many assumed integration would be a breeze, since the companies sat next door to each other and shared a parking lot in a Silicon Valley office park. But the combined company lost its focus, and its executives disagreed over strategy. Late last year, the once-hot property Excite was resold at a fire sale price of just $10 million. Hewlett-Packard is aware of such arguments but maintains that its acquisition of Compaq would be different. On its pro-merger Web site (http://www.votethehpway.com), the company says technology mergers that consolidate two companies in the same industry fare much better than those focused on diversification, like the ExciteAtHome deal. Hewlett also argues that teaming up at the bottom of a business cycle works better, since paying too much for companies is a key reason acquisitions often do not work. Charles O'Reilly, a professor at at Stanford University's business school, says mergers often fail for reasons that bankers may not factor into their calculations. "Think how long it takes before a group of people become comfortable working with a different team. The typical answer is 12 to 18 months." Enough time, he said, for a focused rival to gain substantial market share. Still, not everyone believes a high failure rate of high-tech mergers is a good reason to avoid them. Alec Ellison, president of the New York mergers and acquisitions firm Broadview International, said many companies have no choice but to take risks. "Companies do these transactions because they face crossroads," he said. "Even if the deal doesn't work, compare that to what would happen if the company hadn't at least taken the risk." "It may be a high-risk deal, but then again, what is the risk of not doing it? You can't answer that question, but you have to ask it."