HP Anniversary: Merger goal remains unattained

HP acquired Compaq in order to 'offer the industry's most complete set of IT products and services for both businesses and consumers'. Almost a year after the acquisition legally closed, this goal remains just that: a goal.

          HP acquired Compaq in order to "offer the industry's most complete set of IT products and services for both businesses and consumers". Almost a year after the acquisition legally closed, this goal remains just that: a goal.

          There have unquestionably been improvements resulting from the merger. It's also clear that HP has managed to avoid a major disaster as it integrates these two giant companies' cultures, product lines, philosophies and strategies.

          But this mega union can't be called a success yet. Here are a few reasons:

          -- IBM remains by far the largest provider of IT services, both in terms of size and revenue. It also is a mighty competitor in high-end servers.

          -- Dell continues to be a thorn in HP's side in the PC and low-end server business, and a rising threat in printers and handheld devices.

          -- It's unclear whether HP did the right thing by betting on Intel's Itanium chips for its servers, and whether its plan to migrate server clients to Itanium will succeed.

          -- HP's relationship with the channel remains confusing.

          -- The company has met but not exceeded its financial expectations, failing to wow Wall Street.

          So the Compaq acquisition and ensuing integration is, most say, a work in progress, that still holds the potential for big successes and big failures.

          In other words, at the one-year anniversary of the acquisition, the jury is still out on whether the ultimate goal stated so clearly back in September 2001 will be attained.

          HP is still struggling with its major competitors. It hasn't lost the game, but neither has it won.

          The merger increased HP's services staff to 65,000, gave it new customers and significantly expanded its services portfolio, which covers three broad areas: technical support and maintenance; outsourcing; and consulting and integration. Analysts give good marks to HP about its post-merger services strategy and results so far. But they caution that if HP's ultimate goal is to match IBM's services prowess, much work remains to be done.

          IBM Global Services, which is the world's largest IT services provider, has more than twice as many employees, about three times as much revenue, a bigger services portfolio and a leadership position in name recognition and reputation.

          Bottom line: HP is on the right track in services, but nowhere near its ultimate goal, which the company stated as such when it announced in September 2001 its intention to acquire Compaq.

          So one year after the Compaq acquisition, it's clear clients will not find in HP the breadth and depth of IBM Global Services. But they will find that HP has significantly more to offer than it did a year ago.

          "Generally, HP is being perceived as a viable service alternative by many companies out there," says Traci Gere, an IDC analyst.

          Prior to the merger, current and potential clients had been demanding that HP offer more services, says Juergen Rottler, HP's vice president of marketing, strategy and alliances. "In the services market, you have to deliver globally and seamlessly a broad range of capabilities," he says.

          HP needs a strong services unit to push its nascent enterprise systems "adaptive infrastructure" strategy, which, like IBM's on-demand push, aims to give users services and products that can be adapted according to changing business needs.

          "This approach is the wave of the future in IT services," says Andrew Efstathiou, a Yankee Group analyst.

          And HP Services is heading down this path, Gere says. After the Compaq merger, HP Services has become much more aligned with HP's enterprise systems group, particularly for the adaptive infrastructure effort, IDC's Gere says.

          Grant Westcott, head of technology infrastructure at the Canadian Imperial Bank of Commerce (CIBC), HP's largest services client, likes what he's seen merger-wise, and is hoping for continued improvements. He gives HP a score of between 6 and 7 out of a possible 10 for its performance so far in the outsourcing contract CIBC awarded HP in September 2002, a seven-year, $US1.5 billion deal.

          "The cornerstone for us [in the coming year] is great service at the right price, and HP is doing pretty well," he says. "If they're able to sustain or improve that service relationship and keep their pricing competitive, there'll be quite a lot more business coming their way from us."

          HP is still learning how to get the biggest synergies from its merged services unit, but the potential for great results is evident, he says. "I can't give you a sound bite saying 'yes, it's perfect.' But I can say that it's getting more and more interesting by the day," Westcott says.

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