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Hewlett-Compaq's Tough Road Ahead
By Monica Rivituso
THE PROPOSED $20 BILLION merger of Hewlett-Packard (NYSE:HWP - news) and Compaq Computer (NYSE:CPQ - news) snowballed into one of the fiercest proxy battles the tech industry has ever seen. Yet as difficult as the past six months have been, that's nothing compared with what lies ahead if this merger is ultimately approved.
Given the tenor of debate inside Hewlett, it's no wonder that both sides are claiming victory. Shortly after the conclusion of H-P's special shareholder meeting Tuesday, management issued a statement saying it believed investors had approved the merger. But Walter Hewlett, the board member, son of co-founder William Hewlett and chief merger opponent, wasn't willing to concede defeat. At a press conference after the meeting, he told reporters that he, too, was optimistic, adding that the vote was so close that it is ``impossible to know the outcome at this time.'' The final vote tally should be announced in a few weeks.
If the deal is approved, H-P Chief Executive Carly Fiorina will still have her work cut out for her. The next 12 to 18 months are critical, as Fiorina and the postmerger integration team try to knit the parts of these giant companies into one cohesive fabric. Forget the notion that shareholder approval of the merger was a referendum on Fiorina's stewardship. How skillfully these two companies can be integrated will be the real test.
When two giant corporations merge, thousands of new decisions suddenly have to be made — everything from which email system the combined company will use to which facilities will be closed. During this time, the smallest projects matter, says Mark Sirower, head of the M&A practice at the Boston Consulting Group and author of ``The Synergy Trap.'' At the same time, the new company must continue to keep an eye on its customers and competitors — no easy task amid the postmerger hullabaloo. Perhaps most vexing, the company must accomplish all of these things under rigid time constraints and intense public scrutiny. ``People are just going to be looking for the stuff that doesn't work,'' says Sirower.
In the short term, count on lots of stuff not working. Although H-P says that the merger will translate into a 13% earnings increase in fiscal 2003, its first full year as a combined company, revenue is expected to fall 5%. While the new H-P is juggling its varied product lines and meshing everything from sales and marketing to suppliers and distributors, it will also be fighting to maintain market share in a fast-moving industry where competitors like Dell Computer (NASDAQ:DELL - news) and IBM (NYSE:IBM - news) are lining up to poach customers. ``The first 18 months will largely be [characterized by] the competition cleaning [Hewlett-Compaq's] clocks,'' says Thomas Doorley, CEO of Sage Partners, a Boston-based consulting firm.
Moreover, most merger integrations take longer that expected — up to three years in some cases. ``I'd be stunned if you saw any achievement of significant synergies in less than a year,'' says Robert Mittelstaedt Jr., vice dean of executive education at the Wharton School of Business.
Needless to say, a clear, coherent integration plan is critical. H-P, to its credit, seems to have done its homework. In announcing its rationale for voting in favor of the merger, independent advisory firm Institutional Shareholder Services said ``it is hard to remain unimpressed in the face of such enthusiastic attention paid to the integration effort.'' Some 600 people have been planning and plotting the details of exactly how these companies will be combined. From a procedural standpoint, ISS said, ``it appears that management has done everything it can to maximize the chance that integration will be a success.''
Now H-P has to prove it can pull it off. While most of the integration details have been decided, industry watchers say management must articulate clear, credible targets and a realistic time frame to employees and investors so that the process can be monitored. For example, it's not enough to say that $2.5 billion will be trimmed from costs. Far more helpful would be to explain exactly how those cuts are being made, says Sirower. He cites MeadWestvaco (NYSE:MWV - news) as a company that effectively established and communicated benchmarks. Shortly after the Mead-Westvaco merger was closed in January, he says, the new company launched a joint Web site that detailed how it would combine the two organizations, and how the work force would be reduced.
Consideration for employees can't be underestimated — after all, they're the ones who keep the company running. Large mergers tend to be unsettling events that sap worker morale. Employees in Compaq's home town of Houston, for instance, might not relish the thought of working in a distant outpost of Palo Alto, Calif.-based H-P, notes Roger Kay, director of client computing at market research firm IDC. Approximately 150,000 employees across the globe work for H-P or Compaq (about the population size of Irvine, Calif.) — and about 10% will be let go. If the postmerger integration process is poorly organized, employees will feel increasingly unstable in their jobs. And according to Mittelstaedt: ``Uncertainty is the biggest enemy.''
With the he-said, she-said of the past six months now largely laid to rest, the task turns to the complicated process of combining H-P and Compaq. It's a job that will put Fiorina's leadership skills to the ultimate test — and will make a vituperative proxy battle seem dull in comparison. Assuming the merger is approved, that is.
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