HP, ready to take on IBM, must win customer trust
By Peter Henderson
SAN FRANCISCO, March 21 (Reuters) - The new Hewlett-Packard Co. (NYSE:HWP - news) will be jostling for the title of the world's No. 1 computer company, but size may matter less than trust and the technology giant will also have to win over customers after a divisive merger battle, analysts said on Thursday.
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Together HP and Compaq Computer Corp. (NYSE:CPQ - news), which will carry out the largest computer industry merger ever if voting officials in coming weeks certify HP's claim that shareholders narrowly approved the deal on Tuesday, will be about the same size as International Business Machines Corp. (NYSE:IBM - news), with about $80 billion in revenues each.
Opponents failed to block Chief Executive Carly Fiorina's merger plan despite a four-month battle, so the company is now positioned to fulfill Fiorina's plan to take on IBM, which is the largest integrated computer maker in the world.
HP produces more personal computers and dominates the lucrative printer market but IBM's services organization is roughly three times as large as HP and Compaq's combined, with $35 billion in 2001 revenue.
IBM also has a strong $13 billion software organization compared to HP's small, unprofitable one.
Broad hints from HP and a look at market share have led industry watchers to guess that HP will use Compaq's well-regarded storage system and its NT servers, low-end network computers that run Microsoft Windows, in stitching together its product line-up. The combined company is also expected to use HP's own high-end Unix servers and Compaq's mainframe-style computer, called the Himalaya.
IBM competes in each of the computer areas with about $33 billion in total hardware revenues.
ROAD MAPS PROMISED
Fiorina promises product road maps as soon as the deal closes, around mid-April, and Martin Reynolds, an analyst at Gartner Inc. technology research firm said that would not be a big problem for customers or the company.
``It is theirs to mess up rather than something that is really difficult to do,'' he said.
The key indicator of success will be whether HP can shave margins by cutting the $2.5 billion in costs Fiorina has promised, along with identifying 15,000 job cuts, about 10 percent of the combined work force, in six to nine months, he said.
The job cuts, and the lingering rancor after the nasty fight over the $20 billion Compaq deal, will challenge HP, said Giga analyst Rob Enderle. A vocal and substantial number of HP employees were opposed during the six-month merger fight.
The merger is predicated on corporate customers turning to big suppliers for their every need, including planning, which requires trust that is in short supply at HP, he said.
``They've already got this group of employees that appears to be just on the verge of open revolt,'' said Enderle.
``Part of what makes IBM what it is the very high level of trust that exists between IBM and its customers. You can't build that trust if the employees themselves don't know if they are going to be around,'' he said, adding that 6-9 months of limbo waiting for the job ax to fall was too long.
HP customers do not appear to have defected yet, given two quarters of strong financial performance, and Fiorina has promised to clear up job uncertainty.
Shane Greenstein, a professor at Northwestern University's Kellogg Graduate School of Management, said she should trim the administration and cut duplicate high-profile jobs like country managers in a straightforward process.
GOOD CHANCE FOR SERVICES CONTRACTS
He calculated that HP-Compaq together had about the same number of relationships with technology officers at the top 2000 global companies as IBM, which gave the merged firm a good chance of competing for services contracts.
Executives would begin quitting in six months if the merger was failing, while HP would begin announcing important new deals in nine months to a year if things went well, he forecast.
The risk, he said, was that Fiorina's presumed hairsbreadth
victory could diminish her power rather than cement her control, especially if dissident board member Walter Hewlett, who led the merger opposition, remained on the HP board.
That would mean big customers might question the mandate of HP's CEO, he said.
``It reminds me much more of politics in Washington where you start to think of how much discretion an executive has as a consequence of the margin of victory,'' he said.
(Additional reporting by Caroline Humer in New York) |
