Fiorina ups the ante with Compaq purchase

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 this HP move and the timing of the announcement was
the least of them. More interesting was the wealth of promises made
to investors and the role that Linux may be playing in corporate
calculations.

Waiting until late Monday night was a curious strategic move for an
executive who has been a master of public relations. Back when 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 a 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 , but it must have been intentional.

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 head on 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, 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 Compaq CEO Michael Capellas called “the mother of all reorgs” in 1999, Compaq never was able to integrate its acquisitions 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. Both CEOs first met at a government sponsored
public policy committee meeting . They quickly learned neither of
them cared much about public policy. They also found they got along
personally. Last year Hewlett Packard and Compaq put together a B2B exchange to give them greater leverage with hardware component
makers, a deal Fiorina claimed that took “about 20 minutes.” Since
then, both executives have frequently said nice things about each
other in public. If Capellas stays on past the official merger, he
could turn be a major help to Fiorina, if he doesn’t gun for her
job. Back at the time that Fiorina took the job as HP CEO, I
suggested that she and Capellas had the wrong jobs. I thought that
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 how the two of
them work together, and for how long.

However long that may be, the two executives 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 official
words, in the corporatespeak announcement and later press conference, were that the company would “rationalize” its product line and
generate “efficiencies” in administration, marketing and
manufacturing. In plain English it meant that entire product lines and
are heading for the dumpster, and so are lots of employees. Happy
Labor Day! Between 15,00 and 17,000 employees may be getting pink slips, and that
could be just the beginning. As Fiorina admitted in the Tuesday
morning press conference, the key to the deal is “taking people out
of the business.” HP announced that it expected to cut costs by
another half billion dollars by fiscal year 2004. Both Fiorina and Capellas
made it clear that corporate sales forces and engineering staffs are
going to get hacked right along with administrators and back-end
personnel.

What role will Linux play? The official merger announcement made
several references to consolidating on Intel’s Itanium architecture
and on “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 old 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 has succeeded. A
disproportionate number of the first large corporate adapters
deploying Windows 2000 as a back-end solution hung that operating system 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 comes from its
Microsoft-related business.

There are additional barriers. Competitors and employees may seek to
block the deal. European regulators, in particular, have been wary
about approving deals that concentrate the market or lead to massive
layoffs. Compaq investors may object as well. Compaq has been
generating revenues at a rate about 90% of that of Hewlett Packard.
However, the deal values the HP business almost twice as high as
Compaq.

Assuming the merger is permitted by investors and regulators, the
newly merged company will have a dramatic impact on Linux acceptance in
the corporate marketplace. If the new HP embraces the approach
taken by IBM and uses Linux and Itanium as the strategic unifiers of
its businesses and technologies, Linux could rapidly become the
dominant back-end architecture. If the combo 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.