September 4, 2000

Fiorina ups the ante with Compaq purchase

Author: JT Smith

- by Jack Bryar -
Open Source Business -

No one ever accused Hewlett-Packard CEO Carly Fiorina of mishandling
a PR opportunity. However, more than a few observers may have wondered
why HP delayed the formal announcement of its takeover of Compaq
computer until Labor Day night. It was a curious move, but there are a lot of
things that are curious about HP's move and the timing of the announcement was
the least of those.

More interesting were the wealth of promises made
to investors and the role that Linux may be playing in corporate
calculations.

Back when the Fiorina worked for AT&T she was the person most
responsible for the spinup that launched Lucent Technologies. Fiorina used PR magic
to reposition that tired old vendor of last-generation telecom switches
into an developer of next-generation communications technology. It was
such an impressive performance that it helped her land the CEO's job at
Hewlett-Packard. So why HP waited to make the announcement until
exactly one minute after East Coast TV stations had gone to bed, on one of the
lowest ranked viewing nights of the year, is a little hard to understand.

Even harder to understand is why Fiorina thinks this merger is a
particularly good idea, or what this is going to mean for role that Linux will play
in the combined companies.

In some ways the fit makes sense. HP is a major player in low-end
consumer hardware markets. It dominates in retail outlets ranging from Staples to KMart.
Compaq has grown into an equally dominant corporate vendor. HP
continues to be a major player in the printer and scanner market-- a place where
Compaq has no footprint at all. The combined entity could provide an
end-to-end solutions for many large corporate buyers.

In other areas, the two companies go directly head to head with
competing products and technologies. Both companies have half-developed services
businesses. Both have lots of proprietary servers and competing visions
of the network and Internet access device marketplace. The combined
company will be huge, and will begin with a combined employee base approaching
145,000. Although most divisions will be run by HP management, there
will be plenty of places for partisans of those contending visions to hide.

Despite a restructuring that Compaq CEO Michael Capellas called "the mother of all reorgs" in 1999, Compaq never was able to integrate its accessions of companies
like Tandem and Digital Equipment. The most recent reorg announced
three months ago
has hardly had time to work itself out. It is a
fair question to ask how or whether all parties in the new venture will
learn to work together.

How the top level managers work out their relationship could be
nearly as interesting. Fiorina and Capellas have crossed paths
before. Last year, HP and Compaq put
together a B2B exchange
to give them greater leverage with hardware
component makers. Both have frequently said very nice things about each
other in public. Back when Fiorina first took the job as HP
CEO, I suggested that she and then newly appointed Compaq CEO had the
wrong jobs. I thought the political knife fighter Capellas was better suited
to do battle with the entrenched corporate fiefdoms at HP, while
Fiorina could have given Compaq a much needed PR boost. Now that the two of
them will be working together, it will be interesting to see what happens, and for how long.

However long that may be, the two may both stay employed longer than
many current employees. If the deal is approved, the two companies have
announced they expect to realize "cost synergies" of at least $2
billion a year, within 12 months. This is an extraordinary public
announcement. Merging companies frequently announce that they expect "significant"
synergies or use similarly vague language, but to throw up a hard number and to
itemize where the savings are going to come from right at the beginning is
almost unheard of. Both Compaq and HP have had rough going recently, and for a
CEO to promise specific financial goals in a merger document is usually
a good indication of deep trouble.

Where will the "synergies" come from? The announcement was written
in corporate speak, but the first indications were that they were going to
come out of the pockets of employees and consumers. The official words
were that the company would "rationalize" its product line and generate
"efficiencies" in administration, marketing and manufacturing. In plain
English it meant, entire product lines and are heading for the
dumpster, and so are lots of employees. Happy Labor Day! More than 17,000
employees may be
getting pink slips, and that could be just the
beginning. HP announced that they expected to cut costs by another half billion dollars by fiscal year 2004.

The role that Linux will play may turn out to be even more
interesting. The official merger announcement made several references to "open,
market-unifying architectures and interoperability," which may refer to Linux.

Or it may not.

Both companies do a fair Windows business. As far back as 1999, both
Compaq
and HP had
announced support for Linux

as an operating systems alternative.
While
both Compaq
and HP continue to support the Linux operating system, neither has been able to make
a convincing break from their older proprietary Unix systems. Compaq,
in particular, has continued to pitch both
Linux and its proprietary version of Unix
. In addition the
company has made a powerful effort to pitch itself as the third member of
the Wintel duopoly. To a great extent that effort had succeeded. A
disproportionate number of the first large corporate adapters deploying Windows 2000 as
a back-end solution hung that software on Compaq Proliant servers.
While HP has made much of its Linux
initiatives
and championed the deployment of Linux-based
infrastructure solutions, the newly combined server, storage and "infrastructure"
division will be headed by a Compaq executive, Peter Blackmore. As Compaq's v.p.
of sales and services, Blackmore may understand the operational logic of
using Linux to tie the company's business units together. However, he can
also count, and today the bulk of Compaq's cash has come from its
Microsoft-related business.

Assuming the merger is permitted by U.S. and European regulators, the
newly merged company will have a dramatic impact on Linux acceptance in
the corporate marketplace. If the new firm embraces Linux as a
strategic unifier of its businesses, similar to the approach taken my IBM, Linux
could rapidly become the dominant back-end architecture. If it abandons
Linux, or continues to display an ambivalent attitude about the
platform, Linux could easily revert to the status of a niche operating system, operating on
IBM equipment but largely irrelevant to the larger IT community, despite
all the efforts of its grass-roots evangelists.

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