March 21, 2002 12:26
Hewlett-Packard, Compaq Executives Face Daunting Challenge of Integration
By Clint Swett, The Sacramento Bee, Calif.
Mar. 21--Now comes the hard part.
Two days after Hewlett-Packard Co. officials declared victory in its proxy fight to merge with Compaq Computer, and a day after Compaq shareholders approved the marriage, management of both companies face the daunting task of integrating two giant entities.
If history is any guide, they are bucking heavy odds.
Business is littered with technology mergers that went awry, and experts say that despite the brave words of management, huge obstacles remain.
Those range from a clash of corporate cultures, to encroachment from competitors to distracted employees, a group that includes some 6,000 workers in Roseville.
"Everyone has good reason to look at this merger with caution," said Raymond Miles, a professor emeritus specializing in organizational behavior at UC-Berkeley's Haas School of Business.
"It's highly unlikely to move exactly as anticipated. There are just too many variables."
One of the most immediate examples of a merger gone sour is Compaq's difficulty in digesting Digital Equipment Corp. (DEC), which it purchased in 1998 to gain access to its sophisticated Alpha servers.
DEC employees never bought into the idea of working for Compaq, which they regarded as a mere PC purveyor. Just four years later, the Alpha server is no longer significant in the industry.
In 1989, HP bought workstation maker Apollo Computer but reportedly lost millions of dollars in trying to bring that company into the HP fold.
"The synergies you see on paper never come to full fruition, and cost savings are always delayed," Miles said.
The woeful track record of merging large technology companies was one of the constant themes raised by board member Walter Hewlett in his high-profile campaign against the merger.
But HP chief executive and chairman Carly Fiorina continued to hammer the point that the two companies had assigned 900 people to work on integration issues.
"We know that people are skeptical of tech mergers because most haven't worked," Fiorina said in a recent radio interview. "But the biggest risk is the integration, not the strategy. That's why we are planning integration in such detail."
On Tuesday, Fiorina told shareholders that as soon as the merger is officially certified, "we will hit the ground running," with a road map of products for customers, a sales team and support team in place and a plan for how different divisions will be combined and what jobs will be modified or eliminated.
She pointed out that the Compaq deal brings with it Michael Capellas, who was brought in as CEO of Compaq in 1999 to help clean up the DEC mess. His expertise will prove crucial in avoiding similar problems in a merger with HP, she said.
Fiorina also pledged that all decisions will be made based on what's ultimately good for the company, with no turf wars and political considerations allowed to intrude.
But even if that's possible, some question whether it is enough. Employees still have to buy into the process, and with a combined company totaling more than 150,000 people, that will require a massive internal sales job, said Richard Dorf, a professor at the UC-Davis Graduate School of Management.
"The key thing is that they have to have a strategy, then all the lead executives have to understand it, believe it and sell it," Dorf said. "You have to tell people fast and reinforce it with good leadership right down to the section leaders."
Much also has been made of a potential clash in corporate cultures, with the legendary "HP way," which emphasizes engineering excellence and consensus, running headlong into the more entrepreneurial culture of Houston-based Compaq.
On Tuesday, Fiorina said a small task force has been focusing on "cultural due diligence," interviewing more than 1,800 employees to find differences and the way to bridge them.
HP employees, for example, rely on voice-mail messages to communicate while Compaq is an e-mail culture. That leads to the potential for people miscommunicating, which is why the company will hold employee workshops to address such issues, Fiorina said.
Dorf said that while many HP workers might be opposed to the merger, most that he knows will now commit themselves to making it work.
"People have to stop grousing and get on with it," he said. "Their sympathies are ultimately with the company and they want to make this happen."
Another pitfall of technology mergers is the quicksilver pace of innovation and the cutthroat fight for customers. Some observers say that while HP and Compaq are distracted by integration issues, product development will stall, customers will suffer and competitors will swoop down to steal their clients.
Tim Burke, chief executive of Quest, a Sacramento reseller of high-end computer systems and a major HP customer, said his biggest concern is the level of support he will get from the companies early in the merger process.
For instance, if he has a technical problem with a piece of equipment, he wonders if HP will pass the buck to Compaq when it comes time to fix problems.
Burke, who sells about $25 million worth of HP and Compaq gear a year, said HP has assured him that there will be no problems, but he remains cautious.
"In our industry, words are easy to come by, but execution is where people fall on their faces," he said.
Despite the potential pitfalls, the technology industry has one thing going for it, experts say. Technology executives, accustomed to the blinding pace of innovation, are much quicker to adapt than those in other industries.
"These companies are very flexible," said Uday Karmarkar, a professor of technology management at UCLA's Anderson School of Business. "They make and break alliances. Design groups from different companies work together. People expect change. So all that is very favorable."
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