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Zsolt Kerekes - Publisher
Zsolt Kerekes has been editor and publisher of the SPARC Product Directory since 1992. Zsolt is also editor of STORAGEsearch.

View from the Hill - #13

Re: Compaq's proposed merger with HP:-

Sun and Dell will benefit in the short term, but HP will recover lost ground and benefit when the IT recession is over

September 3, 2001:- by Zsolt Kerekes publisher of the SPARC Product Directory.
See also:- RAM SSDs versus Flash SSDs - which is Best?
Remember Compaq? - and other blasts from the past
Untangling the HP/Compaq Acquisition - from Gartner Group
HP's Acquisition of Compaq: Beyond the Naysayers... - from Aberdeen
more articles about Sun, SPARC & Solaris - the View from the Hill series

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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.
Postscript... this article above was first published on the day of the HP/Compaq announcement in our news page, and was an immediate gut-feel type reaction. For more views see also:- See also:- Market research companies, ...Compaq profile, ...HP profile

Guest Nibble


by Jean-Jacques Maleval Editor of StorageNewsletter

Hewlett-Packard is expected to acquire Compaq for a sum approaching $25 billion, to form a sizeable entity worth nearly $87 billion. For the moment, we know only that the current executive VP, sales and services of Compaq, Peter Blackmore, will lead one of the four operating units of the new HP, heading a $23 billion business division including servers, storage and software.

The biggest question, now to be answered: - Compaq and EMC each claimed first place in the worldwide storage industry. The issue is now moot: the new HP is clearly the winner.

Questions that still remain:

  • Hard disk drive manufacturers must now deal with a massive (and enormously influential) OEM customer for PC, server and storage system drives. Will this mean further price drops?
  • What will be the new group's final choice for erasable DVD: HP's DVD+RW or Pioneer's DVD-RW, to which Compaq has already committed?
  • On the tape side, you have HP, which makes both drives and libraries, and Compaq, which doesn't manufacture them at all in this sector. Is there a risk of fall-out in the current list of Compaq's OEMs? Overland and Quantum could have legitimate cause for concern.
  • As for SANs, HP is primarily implicated at the high end, with partner HDS - with which the company recently extended by three years an OEM agreement for the Lightning 9900. Will this arrangement hold to the end?

    What will become of the Compaq/IBM accord that allows Compaq to resell high-end Shark systems, and Big Blue to propose StorageWorks solutions? Between HDS and IBM, a choice will have to be made. Compaq has its own, very nice mid-range line of StorageWorks established in the wake of its acquisition of Digital Equipment. Yet its storage subsystems are not compatible with HP's.

One choice is the following arrangement:

  • HDS for high-end storage subsystems that need connecting to mainframes;
  • StorageWorks for the mid-range. It seems unlikely that HP would resell IBM. Moreover, the Compaq/IBM deal was not exactly a success. Did Compaq sell even one Shark? VersaStor should be the core of the agreement, but IBM has had enough. It will also be hard for the two to agree upon a single strategy in matters of virtualization software, especially since each is already well along with its own offers: Compaq has been working on VersaStor within its Enterprise Network Storage Architecture (ENSA), which was recently expanded, while HP has just acquired StorageApps (see below), which will likely be absorbed in its Federated Storage Area Management (FSAM) initiative.

Things will be easier with iSCSI, which is only just emerging, and for which both Compaq and HP have declared their intention of entering the market with products by 4Q01, for the former and 2Q02 for the latter.

How exactly will the two different corporate cultures marry? How, exactly, can personalities as diverse as Compaq's Mark Lewis, VP of Compaq's Enterprise Storage Group, and Nora Denzel, VP and GM of the HP worldwide storage organization, co-habitate? And just how will the two companies' customers respond to their suppliers' nervousness about the future of their storage systems acquisitions?

Ultimately, we should expect considerable difficulties between the teams of both companies, and more importantly, some particularly painful human and technological choices. We can also expect EMC, IBM, HDS and all other NAS and SAN players to take full advantage of the restructuring period, however temporary it may prove. For once, one plus one may work out to less than two, at least in the short-term.

...about the author:- Jean-Jacques Maleval is the Editor of StorageNewsletter. First published in February 1998, it's a 16 page monthly news report on the storage industry.

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