SPARC Product Directory

View from the Hill

Re: Compaq's proposed merger with HP:

short term bad, long term good

The September 3, 2001 press release, announcing the agreement to merge of two of the world's top 10 storage companies continues the trend of mergers and acquisitions we've been seeing in this market all year. You're going to hear a lot about synergy and the complementary roles of these two organisations and their product lines, from their marketing departments. My view is that both these companies were in trouble before the recession kicked in. The effect of the IT recession made it harder to hide these problems.

The source of these underlying problems can be summarised as follows:

• Aside from printers and imaging, which it dominates, HP has been #2 or #3 (market share slots) in a lot of segments within the IT market. The #1 company is nearly always more profitable in these kinds of markets, unless the #2 company is satisifed with its role. HP was not satisifed, and burned marketing effort and resources to try and climb these unscalable mountains.

• Compaq got indigestion from acquiring DEC in the 1990's and never really recovered its manufacturing lead. It did however, become the world's largest VAR, for storage products. But VARS don't make as much profit as their principals.

• When people buy a PC, they prefer to buy it from Dell Computer rather than Compaq or HP.

• When people buy a mid range server they prefer to buy it from Dell Computer rather than Compaq or HP.

• When people buy a mainframe class server they prefer to buy it from Sun Microsystems or IBM rather than Compaq or HP.

Who will be the winners and losers from this merger?

• HP's storage business will get a bigger route to market by using Compaq and its channels. They've been working hard to secure their future in this strategic segment, and the new company will have the critical mass to make this work.

• I suspect that the newly merged business will sell less servers than the sum of the two separate companies.
  
  In the short term the sales and marketing departments in both companies will spend less time thinking about customers, and more time worrying about their jobs. As a result Dell will pick up a lot of unexpected PC business from traditional HP and Compaq customers, while Sun and Dell will find it easier to sell their server products against HP, Compaq and their VARS, relying on the fact that no-one can be too sure which product lines are going to continue and which ones will be scrapped.
  
  In the long term, the new HP will emerge as a larger, more profitable company, and when the recession is over it will be well positioned to retake any lost ground. That's when the benefits of the merger will really become clear.

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