September 04, 2001, 1:50 PM — Stung with the news that Hewlett-Packard Co. (HP) is acquiring Compaq Computer Corp., some analysts are just beginning to form a tentative view of the merger, saying that the advantages of the deal are not completely clear and that the companies are somewhat mismatched.
HP's announcement that it plans to buy Compaq in a $25 billion stock purchase took many industry watchers by surprise, given the similarities between the hardware titans.
"I don't think that this is great news," said Roger Kay, an analyst with International Data Corp. (IDC). "They both have similar profiles to begin with."
Kay said that it is difficult to see where there is synergy between the two companies, despite HP's strength in the printer market, and possible geographical advantages of melding the companies' operations.
Brian Gammage, a principal analyst at Dataquest Inc., a unit of Gartner Inc., agreed.
"This is a defensive move by two struggling management teams who are looking to find a position in the computer industry," Gammage said. "They are putting together two companies that aren't complementary to protect their falling margins and to reinforce their existing market presence."
Kay concurred. "It would make more sense for IBM and Dell to combine," he said, noting Dell Computer Corp.'s efficiency and IBM Corp.'s worldwide presence.
"Picking out of the four major companies (Dell, Compaq, IBM and HP), this is the least complementary pairing," said Gammage, who said that he believed the merger was a product of Dell's price war.
However, Larry Hawes, a senior analyst at Delphi Group Inc., said that despite the companies' similarities, he believed that they do complement one another.
Hawes noted that Compaq's 1998 purchase of Digital Equipment Corp. gave the company some great technology, but commented that the company hasn't had the sales and organization to leverage it. However, Hawes believes HP's expertise can help in this area.
"In some ways, there is an opportunity for them to benefit (from the merger)," Hawes said.
But although saying that the combined company could seize some opportunities in time, the analyst still approached the deal with caution.
"There's no doubt a lot of issues need to be worked out," he said. "Sometimes one plus one just equals two and not two and a half or three," Hawes added, illustrating that the combined company will not necessarily be better than the separate entities.
Tony Iams, an analyst at technology researcher D.H. Brown and Associates Inc. did some different math in terms of the technology resulting from the merger, however.
"I see two pluses, two minuses and a wash," Iams said.
The pluses, according to Iams, begin with Compaq's experience with the Intel platform and the company's ability to support the technology from PCs to back-end servers.
"HP wants to be on Intel and Compaq will help them get there in a big way," Iams said.
Another technological advantage of the merger is Compaq's expertise in clustering, which has never been an HP strong suit, Iams said.
In terms of minuses, "there are too many UNIXes on the table," and it is unclear where they will go with the technology as a combined entity, he said. Another technological concern is how the companies will choose to deal with Compaq's Alpha processor, he said.
The wash is Linux.
"Both companies are involved in Linux, but it's more or less a loss at this point," he said.
While the analysts continued to tally the pros and cons of the merger, all arriving at different sums, most industry watchers agreed that a strong impetus behind the move was probably a desire for both companies to insulate themselves from the punishing blows of the struggling IT industry.
"If you look at the state of the industry, it's about how to manage the downside," said Stephen Lane, a research director in IT services at Aberdeen Group Inc.
"One of the first things Wall Street started talking about is how the combined company could cut costs," Lane added.
In addition to keeping costs in check, the companies are also trying to weather the storm by moving further into services, the analysts said.
"The objective is to get into high-end services and reduce the dependency on hardware. They gain scale, and in the services arena size matters," said Gammage.
IDC's Kay agreed that the tough economic climate probably played a part in the companies' decision to combine forces.
"Some companies are being driven into each other's arms by a bad industry outlook," Kay said.
Kay predicted that although both companies have recently announced layoffs, thousands more employees could get the ax as the companies begin to eliminate duplicated positions.
