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HP-Compaq

Hewlett-Packard has been running a lot of ads lately in an attempt to influence shareholders with regards to the planned merger with Compaq Computer. With 18% of the shares definitely voting against the transaction Carly Fiorina has a tough road to follow if this merger is going to work.

There are other important factors working against the merger, even if it does come off in a March shareholder vote. The largest problem is the track record of high technology mergers. Can you tell fast, without doing an Internet search how many high technology mergers have succeeded in the last twenty years.

Exactly zero.

There are some potent examples already wrapped in this combination. Compaq took over Digital a few years ago. Digital had an $8 Billion business in the high end server field, its own flavor of Unix and the Alpha chip.

Almost none of that business remains with Compaq today. The Alpha chip has been discontinued, in spite of being superior to the Intel Chip in many ways. The corporate cultures clashed and the best minds simply left Digital, leaving Compaq with little to show for the merger.

Carly Fiorina has staked her career on making this merger come to fruition. If the shareholders vote it down or it doesn't work well after that point, she will be looking for a new job.

There are some factors in her favor however. HP has just released earnings and they exceeded expectations in a very poor economic environment. Compaq also, has managed to beat expectations in its most recent quarter.

The problem with this combination, which I first put forward the week prior to September 11 is integration and duplication. Both of these companies have huge PC sales operations.

The advertising makes the following statements.

They note that HP is currently number three in personal computers and afterwards the combined company will be number one. They mention the same thing concerning high end Unix servers, though a look at the math makes me wonder how it ads up. The basic thrust is the combined company will be the biggest and baddest in many important areas.

Due to the years it will take to integrate these companies these promises simply may not happen. Dell Computer is growing faster than either company, making huge gains in the consumer market and expanding their share in the nearly dormant corporate market.

By the time this merger is complete they may find themselves in the same position they were versus Dell prior to the merger. In second place.

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Shmuel Protter
investmenttool.com

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