HP-Compaq: 'I Do' Was The Easy Part

Hewlett Packard CEO Carly Fiorina is about to face the most difficult challenge of her career. Sure, she managed to convince government regulators in the U.S. and Europe that the merger between HP and Compaq was not anti-competitive. And she narrowly succeeded in winning stockholder approval of the merger despite an organized no-vote movement, led by Walter Hewlett, son of co-founder Bill Hewlett. She even survived a court challenge by Hewlett who claimed that she misled and, in some cases, pressured stockholders into voting her way.

But all those accomplishments -- incredible as they may be -- are nothing compared to what she has ahead of her. Now she actually has to pull off the merger and steer the combined company through what are likely to be some very difficult times.

Unlike her most recent battles, she won't succeed just by being articulate and persuasive. She has to win the support of consumers and businesses who vote with their dollars, euros and yens while at the same time focusing on the momentous task of combining two very different companies. And one more thing. She and her managers have to write out about 15,000 pink slips to HP and Compaq employees who will loose their jobs as a result of the merger.

None of this would be easy in good times, but these are not good times for the PC industry. A couple of years ago, lots of HP employees would have welcomed a layoff so they could grab their severance pay and sign up with one of the many startups that were begging for employees. But high tech jobs are now scarce. Many of those who are laid off from HP and Compaq are going to remain unemployed for quite some time.

It's also a tough time for PC companies, including Hewlett Packard and Compaq. Overall, PC sales declined last year for the first time in history and -- despite talk of a rebound -- worldwide sales of PCs were down about 2.7 percent during the first quarter of 2002 over the same period a year earlier, according to IDC. What's more, HP and Compaq -- combined -- are losing market share to Dell Computer. Dell was the only PC company to grow worldwide market share during the first quarter.

Of course, quarterly numbers don't tell the whole story. Things can change in a heartbeat and it's not uncommon for PC vendors to move in and out of first, second or third place in any given market. But, no matter how you read the numbers, steering a PC company through the next several months is going to continue to be very difficult, with or without a merger.

HP has something that no other major PC maker has -- a very valuable printer business. The reason that printers are so profitable is because they are like razors and razor blades. Once someone buys an HP printer, they are a steady customer for HP ink and other supplies. That is not true with PCs. Even though there is an aftermarket for software and peripherals, because the PC is an open standard, the company that makes your PC has no lock on your aftermarket purchases.

HP's printer division will remain a major cash cow but HP has printers whether or not it merges with Compaq. Adding Compaq to the equation gives HP not one but two PC businesses. It's having a hard enough time making money with one line of PCs. I can't understand how it's going to be able to make more money with two lines.

In fact, Fiorina now has the daunting task of having to deal with the redundancies between the two product lines. HP and Compaq have been competing for years with machines that are, essentially, very similar to each other. Now they have to remove some of those machines from the market and convince customers that the products from the combined company are somehow better, cheaper, more reliable or better supported than those of their few remaining competitors.

But what about servers? Fiorina has repeatedly pointed to Compaq's success in the server market which HP hopes to dominate as a result of the merger. True, Compaq is the number one player in this arena with a 22.8 percent market share, but its growth rate is flat compared to number two, Dell whose market share grew from 15.7 to 17.8 percent during the first quarter of 2002, according to the research firm Gartner.

Let's face it; there are plenty of people who are just waiting to watch Fiorina screw up. If HP falters badly, the stockholders will be screaming for her head. If she pulls it off, she'll be a hero, even to the stockholders who voted against the merger. But when she stumbles -- which she surely will from time to time -- she will do so under the glaring eyes of not only her stockholders, but HP customers, current and former employees and the news media which followed this case the way some TV fans follow their favorite soap operas.

But even if this merger does succeed in bringing up the bottom line of the combined company, there will continue to be plenty of bitter people who mourn the loss of their jobs, their choice in the marketplace and their pride in a company which once paved the way for a new way of thinking and working. The late Bill Hewlett and David Packard pioneered the "HP Way," which valued people as well as profits. If Carly Fiorina is wildly successful, she will only succeed in returning HP to profitability. That would be nice for the shareholders, but it's not the HP Way.

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