Gartner out of line on Compaq takeover future

THERE'S NOTHING like a high-profile, contentious IT industry merger to serve as a catalyst for "gloom and doom" predictions. Here's SKC's take on an analyst assessment issued on March 22, 2002.

Printed with permission from Shannon knows Compaq , (c) Terry C. Shannon 2002.

The day after Compaq shareholders voted overwhelmingly in favor of Hewlett-Packard's proposed acquisition of Compaq, Stamford, CT-based Gartner Group weighed in with a polemic fraught with dire implications for the largest and most contentious merger in the history of the IT industry.

On Friday March 22, Paul McGuckin, Gartner Unix & Midrange Strategies analyst published a research note entitled "Ten Key Consequences of the HP/Compaq Deal."

"Whether shareholders approve or veto the proposed merger, Gartner believes that it will have profound consequences for HP and Compaq customers and for the industry," Mr. McGurkin asserted.

"Customers can expect that Tru64 UNIX, OpenVMS, Netaction and many storage platforms are likely at risk," the analyst opined, adding that "Whether merged or separate, HP and Compaq will likely use the decision to justify radical housecleaning of products." HP and Compaq customers have a unique opportunity to migrate off of the aforementioned "risky" platforms.

Indeed, the analyst said, "For many customers, the risk will finally outweigh the technological inertia and loyalty to vendors and products that have kept them tied to marginal products." What's more, enterprises will have a chance to lock in steep, multiyear discounts as HP and Compaq— whether merged or separate—try to win business at all costs to demonstrate their market power and stability.

Despite Peter Mercury's recent assertions to the contrary, "Field service and sales will likely undergo substantial turmoil, as merger-driven reassignments or cost-cutting layoffs cause some of the best employees to leave and some geographic territories to have rougher transitions than others."

Gartner went on to claim that the implications for the computer industry as a whole include likely gains in market share on the part of Dell Computer, IBM and Sun Microsystems, all of whom are likely to exploit disruption and uncertainty at Compaq and HP through at least 3Q02 and perhaps until 1Q03, largely because of the short-term instability associated with merging or implementing alternative plans.

The IT industry as a whole will experience a new round of price cuts as vendors, led by HP and Compaq, try to hold onto market share. At the same time, Linux and IBM AIX will increase their support among ISVs, likely at the expense of HP/UX and Compaq Tru64 UNIX. In an effort to capitalize on proven Compaq amnd HP strengths, Dell and Sun will likely partner with, or acquire, service firms to prepare for a greater focus on selling solutions.

And a bit lower on the food chain, Gartner believes that transformation in the PC, server, and output markets will accelerate as all vendors scrutinize their manufacturing processes, business models and research investments. More plausible is the prediction that customer skepticism of Compaq and HP promises will likely increase as the vendors reveal product road maps and modify premerger promises.

Rejection of the merger would create a different kind of skepticism as the separate companies try to brighten the dark pictures they painted of their futures as separate entities and to convince customers that they have viable alternative "go it alone" strategies. (Based on discussions with senior Compaq executives, SKC believes that Mr. Capellas and his lieutenants have in fact crafted a workable "Plan B" scenario in the unlikely event that such a scenario must be implemented. Compaq's 1FQ02 financial results, due out on April 18, should help validate the Compaq game plan).

Trust But Verify
Taken at face value, these predictions do not bode well for The New HP. While it is true that near-tern disruption and uncertainty should help rival vendors persuade incumbent Compaq and HP customers to seek a more stable IT partner, and while it is evident that Tru64 UNIX ultimately will be relegated to HP/UX "organ donor" status, SKC believes that Compaq and HP are taking steps to minimize distruption and maximize continuity in the firms' respective Customer Service franchises.

Tarring OpenVMS and the merged Compaq-HP storage portfolio with the "risky scheme" brush seems a bit short-sighted: Compaq's midrange StrorageWorks product set—which coincidentally occupies an enviable position in Gartner's "Magic Quadrant"—should profit from the addition of HP's high-end storage portfolio.

As for the OpenVMS operating system, the oft-maligned but financially successful bet-your-business enterprise OS generates an extimated $2B USD or more of high-margin revenue each year, the VMS-on-IPF porting effort is proceeding at a brisk clip, and the OS's unique status as a certified Defense Information Infrastructure-Common Operating Evironment (DII-COE)-compliant product serves as a very compelling life insurance policy.

Then too, any decision to decommit from OpenVMS would cost The New HP a hefty revenue stream while ensuring a rapid and wholesale migration from HP to an alternative vendor such as IBM. Unless Doctor Kevorkian is on call in the Compaq-HP "Clean Room," it is highly unlikely that the OS will be targeted for early retirement.

Although neither Compaq nor HP have stepped up to the plate and affirmed a long-term commitment to the operating environment, this too shall change Real Soon Now: relaible word has it that Carly Fiorina and her Compaq counterparts are drafting a comprehensive statement of support for OpenVMS. SKC advises OpenVMS customers to seek a second opinion, and to adopt a "trust but verify" stance regarding the claims of industry analysts, high-profile or otherwise.