Markets, family decline Fiorina's offer

ometime in the middle of 2001, HP CEO, Carly Fiorina called Compaq CEO Michael Capellas to say: " I'll make you and offer, you cannot refuse. The offer was HP's daring decision to buy out Compaq. Consequently, on September 4, 2001 HP-Compaq sent shock waves in the industry by announcing a definitive merger agreement to create a $87 billion global technology leader. The $25 billion stock deal is expected to transform the technology landscape by creating a rival to Big Blue International Business Machine Corporation and outstrip Dell Computers Corporation as the No 1 personal computer seller. The new HP will offer the industry's most complete set of IT products and services for both businesses and consumers with open systems and architectures. To quote HP CEO," It's about becoming a strong supplier to our customers with unmatched depth and breadth in products, solutions and services. A supplier recognises that the real world of business prioritises speed and choice, flexibility and return of investment over proprietary, inflexible, old world approaches to technology that shackles business to their past and their IT vendors." In addition, the mega company will have a No.1 worldwide revenue position in servers access devices PCs and handhelds and imaging and printing as well as leading revenue positions in IT services, storage and management software. Revenues are expected to grow to $390 million in 2002, $2.3 billion in 2003 and $2.4 billion by 2004. That's the optimistic picture which CEO HP Carly Fiorina and CEO Compaq Michael Capellas are hard selling.

Problems with Hewlett-Compaqard
Sun Microsystems President Ed Zander reflected investors and employees lack of conviction over the deal when he quipped, "So what is it now? Hewlett Compaqard!" Combing the two companies into a powerhouse is going to be a colossal task. HP investors fear that the unprofitable PC business and the competitive server market will both become a much bigger portion of the new HP -- diluting the profits from HP's cash cow, printing and imaging. Currently, printing and imaging constitute a little less than half of HP's revenue. HP and Compaq also face the arduous task of consolidating their duplicate lines of consumer PCs, commercial PCs, Windows NT-based servers, Unix-based servers, storage devices and handheld devices. Yet, another challenge is merging 1,35,000 employees located over 160 countries. Fifteen thousand job cuts have been announced but employees do not know which jobs are to be eliminated, creating fear and uncertainty. At the customer end, the trepidation is about product lines and questions about continuing support to what is now a very large and complex family of products and technologies. Competitors are likely to count on confusion among existing HP Compaq customers to win them over.

Not surprisingly, after the announcement, HP shares dropped 18.7 per cent to a five-year low losing $4.34 billion to close at $18.87 billion on the New York Stock Exchange. Compaq, which could have expected a boost from the announcement, also saw its shares fall to 10.3 per cent to $11.08 its biggest drop in four months. Belying Florina's strong words: "It is going to make us a more effective competitor and an even more effective partner, the market sent competitor Dell stocks up by 4.4 per cent to $22.1 on Nasdaq." After the pummeling in the stock market the value of the deal drooped to $19.6 billion.

Family throws a spanner
CEO Carly's Fiorina's resolve to ignore the negative market sentiment and push ahead with the merger received yet another blow when Walter Hewlitt and David W Packard publically declared their opposition to the deal and pledged to vote their 7.7 per cent against it. The Packard Foundation, one of the largest charitable organizations in the United States decided to back the founding members when it decided to vote its 10.4 percent stake in HP against the deal.

Apart from the huge execution challenges and integration risks, the family is concerned over what family members describe as the loss of the "HP way of life." To the employeeds and the family the HP way defines a unique, family like culture in which employees work hard created new products and are rewarded with life time employment and mutual respect. The company laid a strong emphasis on community, whereas Fiorina's management style lays greater emphasis on productivity and performance related hikes. The decision to lay of 15,000 HP employees in areas where Compaq-HP operations overlap has not gone down well with many old employees and members of the Board. In a press statement issued on December 20, Dave Packard, son of David Packard, said, "The current merger plan assumes that layoffs, synergies economies of scale, purchase of market share and toppling down management can substitute for HP's traditional pattern of sustained innovation by talented employees who trust that their future is aligned with the future of the company"

Fiorina has also taken recourse to the same HP way of life to defend the merger. In a 14 November, 2001 memo to her staff, Fiorina said: "Innovation and reinvention are fundamental to the HP way. Change and risk taking can be unsettling even frightening for some. By preserving the status quo and taking small steps to improve our competitive position will not serve anyone's interest - not customers or shareowners and certainly not the highly motivated people that represent the best of HP and Compaq.

Immediate future
The IDC has forecast that PC sales will remain sluggish trough 2002 with single digit growth in 2003. Corporations are not expected to upgrade products. The launch of Windows XP has not fuelled the wild excitement that was expected in the market.

But as business slows in a shaky economy analysts believe that the stumbling economy could actually strengthen management's hand by underlining the need for consolidation in the computer industry. "In a tougher economic environment, you see more consolidation, more mergers," said Lehman Brothers analyst Dan Niles, one of the most pessimistic on Wall Street about the chance for a quick turnaround in the IT sector.

To provide a final answer is impossible. A merger on this scale is unprecedented in corporate history. Nobody before has dared to create an unconquerable powerhouse. If Fiorina succeeds, she will find an indisputable place as the CEO who dared to dream in the annals of tech corporate history, if she fails her own career could be at stake. As John Gantz a senior analyst summed: "We think the operation will be successful as long as the patient doesn't die on the operating table. There is a lot of risk associated in making this move, mostly around execution, integration, and services," said" For, now the battle lines are drawn; its Florina versus Hewlett and Packard.

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