Compaq and Digital: The Merger with HP

THE FACT THAT Compaq's "PCs first" attitude continued until the merger with HP was consummated can hardly be refuted. What may not be so obvious is that it may have been this attitude that got HP's attraction - and not necessarily in a way that Compaq would have liked.

HP had experience in selling product right across the across the market, from PCs to high-end Unix systems. Certainly IBM was still leader by a long mile but HP was one of few companies even in the same game. Their sales method did not appear to be constrained by the kinds of artificial limits that Compaq imposed and HP was happy to sell any product to any customer.

Certainly HP's acquisition of Compaq would mean that a competitor would be eliminated, that costs would be reduced and HP could also count on new economies of scale and on bargaining power with suppliers because their own leverage was not huge but we believe that there was even more to it.

We suspect that HP was also very aware of the common notion of purchasing something at a bargain price because the owner does not appreciate its true worth and potential. In this case it was the potential profit to be made from the neglected aspects of Compaq's business - which of course were almost everything except the low-margin Windows-based products.

In tough times these low-end systems suffer from a critical disadvantage when compared to the high-end offerings. In most cases the low-end products produce little or no ongoing income whereas the high-end systems continue to generate income from annual maintenance, support and licensing charges. Such income can help cushion the effects of a sustained downturn in sales and this appears to have been an issue that Compaq failed to recognise but HP, with a background of balance in their sales efforts, certainly did.

Incidentally, all through the lobbying for the merger Compaq's dominant emphasis continued to be on PCs. Compaq emphasised the economies of scale and bargaining power that the merger would bring to the PC part of the business. With Compaq already selling in the order of 10 million PCs per year one must wonder why they were already achieving these economies and bargaining power?

Whatever else the arguments on HP's side of the merger did, they certainly diverted attention from Compaq where negative reaction to the proposal was almost invisible. Perhaps the last thing that HP wanted was for Compaq to come under the spotlight and for serious questions be asked about its sales strategy and general modus operandi.

It is very clear that HP would have been foolish to make any public statements about the workings of a company that it was hoping to acquire at a bargain price. Walter Hewlett almost put his foot in it when he wondered why HP should spend $20+ billion to acquire a company which, if left to its own devices, would probably self-destruct within 12 months, but the comment went largely unnoticed. Had sufficient pressure been brought to bear on Compaq they may have modified their marketing strategy and within a few years reached a position of challenging IBM, all without HP.

Already the future of ex-Digital products - and for that matter ex-Tandem products - is looking somewhat more promising at HP and this gives some credence to our theory.

In just the last few weeks there have been press releases covering the almost the entire range of HP's products. We have seen releases about Superdome servers, Linux, printers, iPAQ devices, OpenVMS systems and NonStop servers. This is a far cry from Compaq's press releases of which an estimated ninety percent were about PCs and Windows-based products.

HP's press release about NonStop servers even stated that NonStop, HP-UX and Alpha high-end servers are all very worthy in business-critical computing. To extol the virtues of all three platforms in one statement is vastly different from Compaq's "isolationist" policies, moreover HP is actually offering choices where Compaq divided the potential market between the products and pushed them accordingly.

One might say that in these difficult times for the IT business beggars can't be choosers, and this flurry of assorted press releases is nothing more than a display of commonsense as HP try to sell any and all products. The fact remains that in early 2001 the dot-com boom was collapsing like a pack of cards and yet Compaq's sales emphasis on PCs never altered despite the low margins that these sales would bring.

HP truly appear to regard PCs as a useful means of selling printers and digital cameras into the domestic and small business market, and that is it. PCs are a means to an end and they are just one segment of a range of products.

For anyone who believes that the mrger with Compaq will drastically alter that situation it is worth remembering that despite the current "cult of the CEO", a company is far more than just one person. It is the executive and the board that control the direction of any company and after the merging of the companies HP has retained the advantage in both forums. With this in mind we expect the product-neutral attitude to continue.

Notably also, Carly Fiorina has visited the almost legendary "ZK0", the home of the OpenVMS team. In an hour-long speech to these people she professed an admiration for Ken Olsen and his work as Digital CEO, and she acknowledge the high quality of software from Digital. Fiorina also announced certain plans for OpenVMS which, according to reports, were received with enthusiasm and optimism by the assembled audience.

Cynicism dies a slow death and so many ex-Compaq customers - and probably insiders who felt marginalised under Compaq's management - will be waiting for continued evidence of this more balanced approach by HP. Only when confidence in the company and the products has returned will these people make serious commitments to the newly merged company. For the moment at least, things are looking somewhat better. µ

See Also
Part II: Compaq and Digital: the broader picture
Part I: How Compaq created the Digital Divide