HP-Compaq deal does Big Blue in the eye

About the same time that news of Hewlett-Packard's acquisition of Compaq was breaking last week, the New Zealand head of IBM, Nick Lambert, was surveying the competitive landscape.

About the same time that news of Hewlett-Packard’s acquisition of Compaq was breaking last week, the New Zealand head of IBM, Nick Lambert, was surveying the competitive landscape.

Apparently unaware of the momentous events that were unfolding, Lambert was cheerfully describing a scene which featured Big Blue towering over a throng of lesser industry beings. From his $US90 billion vantage point (that’s roughly double the size of New Zealand’s economy), he jokingly referred to IBM’s strategy for global domination.

There were references, as well, to the New Zealand competitive scene. EDS was mentioned, somewhat disparagingly. Lambert pointed out that the services giant -- a major customer of IBM, of course -- might be the biggest IT money-maker in New Zealand (revenue last year was $465 million), but it took about 2000 staff to generate it. IBM New Zealand, in contrast, made about $307 million with half as many staff.

Unisys’s name came up as well, as an example of a competitor with which IBM might cooperate from time to time, in the same way as it does with Microsoft. Compaq also rated a mention, as the company which bought Digital for its services business, then frittered it away.

It was all good-natured banter over a pleasant lunch. Lambert was clearly relaxed in the knowledge that IBM was doing all right, thanks very much. While many of its competitors were feeling the pinch of a contracting IT market, reflected in reduced profits, job cuts and declining stock values, IBM’s sales and stock were holding up nicely.

“While others stumbled, we grew revenue, recorded record operational profits and, most importantly, increased our market share in almost every one of our strategic business categories,” said his boss, Lou Gerstner, when IBM’s second-quarter results were announced in July.

How would the mood at lunch have changed if a messenger had delivered news of the HP-Compaq deal? One suspect’s the bill would immediately have been called for, a cab summoned and Lambert and entourage whisked back to the office to revise the global domination strategy.

The deal’s impact looks greater on the New Zealand scene than it does on the worldwide industry pecking order. Suddenly IBM can’t gleefully claim to be more efficient than its local competitors. A combined HP-Compaq business would have about half as many staff as IBM (about 300 from Compaq and 100 or so from HP). Their combined sales, meanwhile, would be close to double Big Blue’s (about $550 million).

HP-Compaq would be able to claim 45% of the local commercial systems and server market, with IBM a distant third – 13% to Sun’s (SolNet’s) 24%. HP-Compaq’s dominance of the PC market is just as complete: combining the two companies’ current PC market share would give them 36%, with Dell a distant second on 8% and IBM a point or two further back. With those market share figures against it, IBM can hardly afford to be complacent.

So much for the local picture. Worldwide, HP-Compaq is almost level-pegging with IBM in revenue terms. If the two companies’ most recent annual sales figures are combined, they total $US87 billion. But it’d be a safe bet that it won’t be until long after the merger that actual sales of the new entity reach that level. For one thing, there’s enormous overlap in the two companies’ product line-ups, all the way from midrange servers to handhelds, with desktop and mobile PCs in between. That’s going to mean serious culling to come.

For another thing, there’s no telling what customers might do. Many of Compaq’s enterprise customers belong to it by virtue of the 1999 acquisition of Digital. Confronted by yet another change of ownership, they might decide to take their business elsewhere. HP head Carly Fiorina asserts that the deal is good for competition which, by extension, is good for customers. But it’s easier to believe that eliminating a major supplier – Compaq – reduces competition rather than enhances it.

While IBM and Unisys have been the subject of some merger speculation, nobody seems to have anticipated this deal. HP has been on the scrounge for merger partners, giving up a bid for the last target of its affections, accountant PricewaterhouseCoopers, last November. To suddenly be leaping into bed with Compaq suggests not so much that it’s a well thought-out strategy than that it is so lonely anyone will do. Let’s hope, for their sake, that the marriage prospers. And maybe IBM will respond by asking for Unisys’s hand.

Doesburg is Computerworld’s editor. Send email to Anthony Doesburg. Send letters for publication to Computerworld Letters.

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