Now comes the hard part...
investors.com
Now Comes Hard Part: Will 'Integrate' Prove 4-Letter Word At HP?
BY MURRAY COLEMAN
INVESTOR'S BUSINESS DAILY
Internet & Technology
Thursday, March 21, 2002
After five months of fighting, the computer industry's biggest merger is anything but settled.
Hewlett-Packard Co. (HWP) continues to claim victory - though admittedly slim - over critics who opposed its $20 billion purchase of Compaq Computer Corp. (CPQ)
As expected, Compaq shareholders on Wednesday approved the purchase of their company by HP. It could take weeks, though, to get the final HP tally. A representative for dissident director Walter Hewlett, son of late HP co-founder William Hewlett, says the preliminary margin of difference is a scant 0.5%, which leaves the outcome in doubt. HP says the margin is larger.
But the merger is unsettled beyond the mere counting of votes. Assuming HP does win, Chief Executive Carly Fiorina and crew likely will have eked out the victory. A clearer mandate would have helped in the merger of two vastly different cultures. Many employees are angry, 15,000 or so layoffs are certain and, on top of all that, there are the basic problems of melding the two.
"This merger fight has created a lot of animosity among longtime employees," said analyst Bob Sutherland of Technology Business Research. "It's bound to affect HP's productivity."
Many in the tight-knit HP community agree.
"Most mega-mergers in technology haven't worked," said Pat Chan, an engineer who was recently laid off by HP. He voted against the merger. "Coming from HP, I know how much it's going to take to integrate both work forces. It just isn't going to be real practical."
That sums up one of the biggest arguments of Walter Hewlett.
Will Take Years
HP, though, says the combined company can cut $2.5 billion in yearly expenses and can claim clear leadership in servers and many other computer markets.
On the other hand, HP executives say they're looking at a two-year process. In the meantime, they say combined revenue will slump around 5%. Walter Hewlett has said the decline could be double that amount.
HP employees at Tuesday's meeting openly showed their displeasure at a deal. Compaq employees, meanwhile, worry that their side will suffer most of the job cuts. That leaves many HP workers upset and many Compaq employees worried about keeping their jobs. And that leaves many analysts questioning just how the 120,000-plus workers are going to perform.
"Since most of their cost savings are going to come from eliminating jobs, they'll be able to hit their targets," said Meghan Graham Hackett, a Standard & Poor's analyst. "But if their workers are less productive, then we could be looking at smaller revenue gains than expected from a merger."
HP boasts that together with Compaq it will have the size to better compete with IBM Corp. (IBM), long the world's largest computer company. Indeed, the combined HP-Compaq revenue last year of $78.8 billion comes close to IBM's $85.9 billion.
But during the integration, the new HP's revenue will decline, while IBM's rises. S&P's Hackett predicts that the merged company's annual revenue could sink to as low as $60 billion in a few years.
And she says it'll be at least a three-year merger process.
Other observers say it's too early to judge how HP workers will react. "That shareholder meeting was packed with employees and retirees trying to push their own agendas," said Andy Neff, an analyst with Bear Stearns. What happened there "can't be taken as an accurate view of how HP thinks as a whole."
Emotions continue to run high after one of the nastiest proxy fights ever. That's not a great environment to start one huge integration effort. Fiorina seemed to sense such misgivings on Tuesday, saying the company was up to the task.
At the meeting, she said HP had studied past mistakes by other companies. "We learned what went well and where mistakes were made," said Fiorina. "Integrations were not planned well. Decisions weren't made quickly. And decisions were made for political reasons."
She says HP and Compaq assigned managers to oversee the integration since the first days of the merger process. She says HP and Compaq have some 900 employees devoted full time to the integration.
That is a significant number, say some observers. "They certainly have designed a good playbook," said Bob Davis, a partner at Highland Capital Partners, a Boston-based venture capital fund. Neither he nor Highland is a shareholder in HP or Compaq.
Sales Will Decline
Davis is the founder and former chief of Web portal Lycos, which he left after it was bought in late 2000 by Spain's Terra Networks SA (TRLY). He's been involved with large mergers.
"Bringing together two work forces of this size definitely can work," said Davis. "HP seems to be taking a smart approach by being very pro-active in its early planning."
The integration, though, will take place against a backdrop of tech's slowdown. Markets in which HP hopes to gain strength by adding Compaq have been hurt.
At first, analyst Sutherland of Technology Business Research estimated that a merged HP-Compaq would see combined sales fall about 3% in the first year or two. He's since increased that estimate to as much as an 18% decline.
And he says HP workers are angered by what some are calling a top-heavy retainment plan. To keep workers during the transition - and the slower growth it will foster - HP is offering a total of $634.5 million in incentives to employees for staying with the company at least a year. The plan ties retention bonuses to specific integration goals.
Sutherland, though, says $33.1 million of that would go just to 10 top HP executives. That's an average of more than $3.31 million per person. Another 6,000 HP employees are being offered $337 million to stay, or an average of about $56,200 a person. The other $264.4 million in incentives goes to Compaq workers.
And while some employees get their incentive checks, others will get pink slips. By Sutherland's forecast, HP could wind up slashing a total of 25,000 workers before the merger's complete, much more than the official 15,000 figure - this at a time of a poor job market.
"The disgruntled won't find many other places to go in this economy," said Joe Beaulieu, a Morningstar Inc. analyst. "That's good for HP," but not so good for the employees.
And when the economy recovers, "veteran HP employees could defect to rivals." |
