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A merger to save two companies

The Hewlett and Packard foundations’ opposition to the proposed H-P/Compaq merger could mean the slow death of both companies. 01/12/17 hed: A merger to save two companies dek: The Hewlett and Packard foundations’ opposition to the proposed H-P/Compaq merger could mean the slow death of both companies. by James Mathewson

There has been a lot of talk this past week about the H-P/Compaq merger. Hewlett-Packard CEO Carly Fiorina was interviewed in the Wall Street Journal and, for the first time, she outlined the thinking behind the deal in terms the investment community should relate to. And her mentor Richard Hackborn, a 33-year H-P veteran and longtime director of the company, explained to the New York Times why he is pushing for the deal. Of course, the detractors renewed their case, including a blathering editorial in e-Week by Michael Zimmerman.

The merger has faced strong resistance from Wall Street, and waits for regulatory approval, which some have claimed could be dicey. While the merger is still under review, it has hurt both companies: Regulators are bound to attach conditions to the merger, including selling off parts of H-P that overlap with aspects of Compaq’s business it acquires. In the meantime, whole segments of the proposed business cannot be promoted because they may not be there after regulators are finished.

Assuming it survives regulators’ scrutiny, the merger still must pass muster with shareholders. This prospect was dealt another blow this past week when David Packard, son of founder Dave Packard, announced he would vote against the deal. He joined other siblings and foundations on the Hewlett side of the aisle, which together account for 18 percent of shares outstanding in H-P. Gaining approval of shareholders at this point is a little like coming back from an 18-point deficit in the fourth quarter of a football game. It can be done, but it will be tough.

If the merger is rejected by regulators or shareholders, it will be a big blow to both companies. The PC industry is in crisis. In order to survive, PC manufacturers have to evolve closer to the Dell model, which uses direct sales and just-in-time manufacturing to squeeze positive margins out of a mature market. Faced with antiquated sales systems, H-P’s PC business is in a tough spot. It does not want to abandon the PC business because its customers want end-to-end solutions. But the PC continues to drag the company down as a loss leader. As Fiorina and Hackborn explained to the press this past week, buying Compaq would get it a lot closer to Dell in the development of a direct-sales system. Saving the PC business would allow the merged company to compete with IBM on firm footing, and enable its R&D team to innovate with a greater share of the profits. A declining PC business could trigger a downward spiral, weakening its position in other areas. And the failed merger would fracture its board and cause the exit of a large contingent of its management team, including Fiorina.

As for Compaq, the merger would save the company. Though it has done a good job of evolving toward direct sales in the PC business, it is way behind on the peripheral, server, and services sides–H-P’s strengths. Without strong positions in these high-margin businesses, any losses on the PC side put the company in danger of going under. It tried to get into the server and services markets when it acquired DEC, but it never fully integrated that business and ultimately abandoned DEC’s crown jewels–products related to the Alpha chip. This merger would atone for the mishandling of the DEC acquisition.

In short, the merger would save both companies and ensure competition for IBM across the board. We should all root for Fiorina to connect on a couple of long bombs and an on-side kick to pull off this comeback.

James Mathewson is editor of ComputerUser magazine and

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