They come from different parts of the technology universe. Computer powerhouse Hewlett-Packard is an invention factory that has created hundreds of products, things like the handheld calculator, over its 62-year history. Compaq hasn’t really invented anything. It sprang to life as an IBM-clone maker in 1982 and shot into the FORTUNE 500 in record time on the basis of its ability to give consumers low-priced machines built with mostly off-the-shelf parts.
But in the current tech recession these two companies have two things in common–a big stake in the PC business and a troubled future. That’s why HP CEO Carly Fiorina brought them together last week in a stock deal initially valued by the companies at $25 billion. Fiorina, one of the most powerful women in American business, is a steely-nerved visionary who once compared her business to a game of blackjack. She has doubled the stakes on a so-so hand. If she wins, she wins big.
The combined company will rival IBM in size and revenue, and theoretically it will leapfrog Dell in sales of PCs and midrange servers, the machines that act as the Internet’s traffic cops. What is in doubt is whether Fiorina can put this heft to good use–and avoid the impact of any further downturn in consumer spending–by selling information-technology services along with hardware to corporations at a healthy profit. It’s the hottest area of IT right now and will be for some time.
The risks of uniting two struggling behemoths were obvious, even to Compaq co-founder Rod Canion, who sketched out the company with a few buddies 19 years ago in a Houston diner. “Now everybody will want to kick Compaq and HP around,” he said last week. He was right. But it wasn’t Michael Dell or Sun Microsystems’ Scott McNealy putting the boot in. Wall Street did a good job of that. HP stock plunged 22% by the end of the week, to $18.08, while Compaq sank 14%, to $10.59, wiping more than $3 billion off the value of the proposed takeover.
The Street is skeptical because both companies have become so focused on making PCs–by now a commodity on the order of a television set–and looked so bruised after more than a year of recession in that industry, that this sudden embrace smacked of deathbed desperation. “This is not a case of 1+1=2,” says Todd Kort, principal analyst for Wall Street’s Gartner Research. “More like 1+1=1.5.”
Fiorina and Compaq CEO Michael Capellas spent the week trying to assure everyone that the math would add up to 3. To get there, she could do worse than to follow in the footsteps of Lou Gerstner. The IBM chief inherited a company torn by turf wars and paralyzed by too many products in the early ’90s. Gerstner healed wounds, cut the sprawl and scaled back the low-margin consumer-PC business, focusing instead on supremely stable high-end servers and the lucrative service contracts that came with them. “IBM is proof that it can be turned around,” says Tony Paoni, professor of technology and e-commerce at Northwestern University’s Kellogg School. “If I were Carly, my first call would be to Lou.”
Despite showing some Gerstner-like tendencies in her first two years of tenure–like cutting HP’s 83 product divisions down to a more manageable threesome–Fiorina is adamant that HP will not abandon the desktop-computer market. “It doesn’t make sense to get out of the PC business,” she said during a conference call last Tuesday. She intends the PC systems, together with the company’s one cash cow, its printing and imaging business, to become “an entree” to making those all-important service contracts with corporate middle America. HP sells about $10 billion worth of services annually, most tied to its proprietary servers. Trouble is, its share of the server market is rapidly shrinking as Microsoft Windows NT-based servers from Dell and Compaq take over. “This is a hard market to crack,” admits John Brennan, HP’s vice president of strategy.
Which is why it would have helped enormously if HP had gone through with last year’s attempted purchase of PricewaterhouseCoopers, the accountancy firm whose fat Rolodexes could turn contacts into contracts. In this respect, Compaq is a poor consolation prize. Not only do the Houston firm’s products and services overlap almost completely with those of Palo Alto, Calif.-based HP, but there is still blood on the floor from Compaq’s semidigested merger with server and storage company Digital Equipment Corp., a disaster described by a Compaq engineer as his company’s “original sin.”
That makes Fiorina’s task all the tougher. “You’re really talking about integrating three cultures–the original Silicon Valley company, the Texas upstart and [Digital’s] bunch of M.I.T. engineers,” says Barry Jaruzelski, head of global computers at Booz-Allen & Hamilton, a consulting firm. “I can’t imagine anything more difficult.” HP sprang to life in 1939 as a manufacturer of testing instruments, such as oscillators. David Packard and Bill Hewlett created a culture defined by the HP Way, an open, people-oriented environment that created an engineering paradise. Indeed, HP could claim that it invented Silicon Valley.
