Capellas says Compaq will not perish without HP

Compaq CEO Michael Capellas held a mock interview with himself yesterday at Internet World Fall 2001, addressing a widely publicised memo he sent to all Compaq employees regarding the pending merger with Hewlett-Packard.

          Compaq CEO Michael Capellas held a mock interview with himself yesterday at Internet World Fall 2001, addressing a widely publicised memo he sent to all Compaq employees regarding the pending merger with Hewlett-Packard.

          Capellas stated emphatically that he fully supported the megamerger, but that the company also has a contingency plan in case the merger does not go through.

          "Plan B says, 'obviously, as anyone would expect, we have to have a business plan that is ongoing, which is quite frankly normal ... it's a question of common sense," Capellas said in response to a question he asked himself concerning his reasons for the memo.

          Capellas, who sent the memo last weekend to the company's 67,000 employees, called it a regular communication and, simply, "an update."

          "That's about as stealthy as you can get, isn't it? A memo to 67,000 employees," joked Capellas. "I somehow knew it would become public."

          "Let me be very clear that I support the merger. Let there be no doubt," Capellas replied to another question from himself.

          In the memo, Capellas wrote that he still supports the deal with HP, but that Compaq is also well positioned to on its own meet the goals that the merger is supposed to help the company achieve.

          Those goals are to extend Compaq's capacity to provide products and services to large corporations, to turn Compaq into a larger service provider able to compete head-to-head against IBM's Global Services division, and to improve the bottom line of Compaq's PC business while staying on top of innovation in new technology areas.

          The memo was sent in response to a decision Friday by the David and Lucile Packard Foundation to oppose the merger, a stock swap deal which was valued at $US25 billion when first announced. The foundation owns a 10.4% stake in HP and is considered by many to hold the swing vote in the merger.

          During the balance of the keynote, Capellas said that a combination of product over-capacity, hardware commoditisation, changing buying patterns, and a weakness in telecoms and dot-coms had brought the internet to another change in its architecture, a change Capellas said "was more evolutionary than revolutionary."

          Optimistic of the future, Capellas said that the next driver of Internet growth will the pervasive use of rich audio and video content, and that such content would be delivered over much of the existing Internet infrastructure.

          "We built all these current applications to handle data; now we need to build it to handle content. It won't be a new architecture, it will be a new content delivery system," said Capellas.

          Capellas said Compaq's Adaptive Infrastructure initiative is a key example of a next-generation content delivery system. Recently announced with Compaq's server blade strategy, the Adaptive Infrastructure Strategy (AIS) calls for the addition of advanced failover and clustering technology, remote system management, self-healing technology for server hardware, and system automation.

          "The hype is gone [from the internet]," Capellas said. "Our optimism about this stuff has become real."

          Attendees appeared to think that Capellas' assertions about latent demand building up in the economy, and his defence of "Plan B," in case the merger with HP falls through, made sense.

          "It's like the military -- you're an idiot if you don't have some sort of backup plan in place," said Peter Johnson, an internet marketing consultant who runs the SiteCom Strategies constancy in Bronxville, New York.

          "I don't think the fact that he sent some sort of memo to his employees means that he has lost faith in the merger, although without the backing of the [Hewlett and Packard] families, it could be a blow to its chances of success."

          Johnson also agreed that there is latent demand for IT building up this year.

          "IT managers were putting some plans on hold in the second and third quarters due to the economy and with the terrorist attacks, that was a further reason or excuse to hold off a little more. But they're getting ready to tee off projects, and I think we'll see demand for IT pickup as these projects get off the ground in the middle of 2002 -- you can't put necessary projects on hold forever," he said.

          Other attendees said the keynote was business as usual.

          "Of course [Capellas] is going to put the corporate spin on [the merger]," said Rick Whitney, director of web design and development at Distance Learning in New York. "These [mergers] happen all the time and sometimes they fall through; the idea of what he was saying about a backup plan could just be more spin control."

          If the decision to abandon the merger plans is made, it will come "in another few weeks," according to Thomas Perkins, a member of Compaq's board of directors, cited in The Wall Street Journal on Tuesday. "If it drags on for months and months and months, it's not good for both companies," he said.

          Compaq could ask for a preliminary tally of HP shareholders that support the merger and insist on canceling the deal if HP can't show it has enough votes, The Wall Street Journal wrote Tuesday, quoting an unidentified source close to the Compaq board.

          Joris Evers, an IDG News Service correspondent in Amsterdam contributed to this report.

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