Shareholders from the two companies will vote in about three weeks (HP’s on March 19 and Compaq’s the following day) on whether they like the idea. Pundits, including analysts Gartner and IDC, are now beginning to believe that despite opposition to the deal by family of HP’s founders (who control of about 18% of HP stock), the majority of shareholders will back it. Walter Hewlett, an HP board member and son of one of the founders, is leading the resistance, calling the deal flawed and pointing to the failure of big computer company mergers of the past (the Compaq-Tandem and Compaq-Digital deals are two “flops” he draws attention to).
That well-publicised opposition has caused HP, in particular, to talk up the value of the deal to shareholders. It will bring “cost savings of $US2.5 billion annually, adding $US5 to $US9 to present HP share value, give the merged company the ability to lead the market in servers, storage and management software, and result in a doubled sales force that could reach 160 countries”.
Compaq has chimed in telling its shareholders that the merger “offers the best way to increase the value of your Compaq investment”.
A striking thing about what the merger cheerleaders are saying is that it is directed at shareholders, not customers. It’s tempting to think that the difference in view between the merger opponents and proponents comes down to the values of family-owned businesses versus those of ones beholden to shareholders: family firms worry more about customers than investors, and vice versa for publicly owned ones.
That’s where regulators come in. Their concerns undoubtedly vary from country to country but, generally, they’re interested in maintaining the health of markets, rather than stocks. That means keeping competition alive, to the benefit of both buyers and providers of products services. A major hurdle for the HP-Compaq merger was passed when the European Commission gave it its blessing. New Zealand’s regulator, the Commerce Commission, is now considering whether to do likewise. HP has argued its case in a 70-page document which the commission has until later this week (unless it gives itself an extension, which it can do under the Commerce Act) to say yes or no to.
On the face of it, combining the two companies’ shares of the various segments of the New Zealand IT market would seem to limit competition. According to latest IDC figures, HP-Compaq would end up with more than a third of the PC market (Compaq leads that segment with about 22% share with HP second with about 11%). The PC business of the merged company’s closest competitor, IBM, would be just a third as big. Is that good for customers? According to a veteran advocate of end user interests, it’s probably not bad. And working down through the list of market segments in which HP-Compaq will compete, he doesn’t see any cause for concern about reduced competition. “I’m sure Sun doesn’t view the deal as reducing competition,” he quips.
But the Commerce Commission might see things differently. In the printer market, the merged company will have more than 40% share; in the PC server segment, Compaq’s 29.6% and HP’s 11.9% total 41.5%; and in the enterprise storage market (measured by revenue), Compaq’s 30.6% share plus HP’s 8.8% total 39.4%. While perhaps not overwhelmingly dominant, these figures certainly will be getting close scrutiny. (For an idea of how the commission thinks, take a look at the Practice Note on Business Acquisitions document (under the Adjudication heading) on its website.
Shareholders and regulators notwithstanding, the merger is intended to be concluded before the year’s half over. Then customers will begin to know whether it’s going to be good for them. Let’s hope it is.